6/7/2013 4:37 PM ET|
EMC's ViPR could bite Amazon
The new storage platform is pitched as simple and cost-effective, but IT departments are still reluctant to spend.
It still seems as if Wall Street is unsure of what to do with shares of storage giant EMC (EMC).
Management has come out with lower-than-expected fiscal 2013 guidance, and uncertainty remains surrounding VMware (VMW), which is 80% owned by EMC.
Although VMware is still the clear leader in the virtualization business, weak enterprise IT spending has taken a toll on its business. Consequently, VMWare's stock is down nearly 30% so far this year, as the Street takes a wait-and-see approach.
Fairly or unfairly, these concerns have impacted how the market views EMC, which has seen shares slide 4% this year. This is while rival NetApp (NTAP) has posted 11% gains. But I suspect all of this is about to change.
Earlier this year, Joe Tucci, EMC's chairman and CEO, who is one of the most underrated leaders on the market today, discussed his company's position on the market. He said:
"EMC remains squarely at the center of the most disruptive and opportunity-rich shift in IT history, propelled by the benefits of cloud computing, Big Data and trusted IT. These high-priority IT spending areas are core to our strategic focus and represent market segments where EMC has established leadership positions and competitive advantage."
Essentially, while the market was discounting EMC's prospects, management showed strong confidence in its capabilities.
It recently launched ViPR, a "software-defined storage" platform designed to provide IT departments and enterprises with a cost-effective and simple way to manage large data centers via the Web without sacrificing features.
With ViPR, EMC has responded to Amazon.com's (AMZN) dominant cloud platform, known as Amazon Web Services, which had become the standard for IT departments looking for a low-cost way to shift their hardware and software data-center functions to the cloud.
As more companies migrated from local storage, this diminished the importance of EMC and its strength in "Big Data." It also raised questions about VMware's profit potential and the overall direction of the virtualization market.
But with ViPR, EMC becomes a formidable rival to Amazon, the Street understands why Tucci had spoken with such confidence a couple of months ago.
Given how widely regarded Amazon Web Services is, ViPR likely won't dethrone Amazon right way. But I don't believe it has to. And it doesn't seem as if that is what EMC's management cares about. ViPR's support of third-party hardware and software, even from NetApp and Microsoft (MSFT), speaks to the level of self-belief that EMC has as a market leader.
Essentially when management boasted about the simplicity of ViPR, they meant it -- even if it means potentially helping rivals advance their own interests.
With ViPR, EMC has placed the needs of the customer first as enterprises will no longer have to choose between operational simplicity and leading-edge storage capabilities.
This is the second significant change in the company over the past two months. The first was when the company announced that it was taking EMC assets including analytics, cloud computing and Big Data and spinning them off into a new business called Pivotal, which will be jointly owned by EMC (69%) and VMware (31%).
Management realized that although data analytics and cloud computing were strong performers for the company, they were nonetheless getting lost in the shuffle.
By creating a separate entity, EMC appears to think that Pivotal can realize more value and can become another strong catalyst to EMC's long-term growth, especially since the total available market for Big Data is projected to grow by as much as $17 billion over the next three years.
The challenge for investors is trying to figure out which companies are best-positioned to capitalize when IT spending resumes. Given the bearish tenor that permeates the storage/cloud market, we won't know how right EMC's management is for at least several more quarters. But given management's track record of strong performance, I wouldn't bet against them.
Although EMC doesn't look like a stock that can ring sizable gains this year, current trends and fundamentals support a fair value of $30 per share over the course of the next 12 months, which is a 21% premium to current levels. I wouldn't wait to accumulate these shares, though. From the standpoint of its product cycles and growth capabilities, there is no company that is better positioned to capitalize on a recovery in IT spending.
At the time of publication, the author held no positions in stocks mentioned.
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