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Online Extra: EMC: Time to Put Your Money in Storage?


The undisputed king of data storage, EMC (EMC) is the kind of blue-chip company that most technology investors want to own for the long-term. True, the stock got ahead of itself last fall when it rode high on investors' hopes that the storage sector would somehow be spared in the capital-spending slowdown. From a high of $105 last September, it plummeted to $25 in April, 2001. It's now hovering around the much more reasonable price of $34. Shares took a beating on May 29, falling 8% after the company finally acknowledged it was feeling the effects of the tech slowdown and cut 1,100 jobs. A downgrade from investment bank Goldman Sachs that same day didn't help matters.

Long term, EMC still looks like a solid play, though. Thanks to exponential growth of everything from e-mail to Web pages, the data-storage industry has a bright future. EMC Chief Technology Officer James Rothnie predicts growth in total storage demand from 200 petabytes (that's a quadrillion bytes -- think 14 zeros) in 2000 to 10,000 PB by 2005. At the same time, with ever more powerful and efficient storage gear, the cost per megabyte will fall from 30 or 40 cents now to 1 cent by that time.

Still, the market for storage hardware will grow from $44 billion in 2000 to $100 billion by $2005 says Rothnie. EMC posted $9 billion in sales last year. Assuming the company merely holds on to its roughly 20% market share, that's a lot of growth ahead.

UNEASY FEELINGS. So is now the time to load up on the stock? Perhaps not. Some Wall Street analysts wonder whether EMC will meet forecasts for the quarter ending in June. Wit Soundview analyst Gary Helmig cut his estimates and downgraded EMC from a buy to a hold rating on May 21, citing "the uncertain environment and the potential for further disappointments," in a note to clients that day. "We will be more comfortable with the stock at $30," he wrote. Although most analysts are more optimistic in general, they're uneasy about the coming quarter. Even Bill Shope, an ABN Amro analyst who upgraded the stock on May 1, says: "I don't know anybody who expects a blowout quarter."

Analysts expect the company to post earnings of $440 million, or 19 cents a share, on revenues of $2.6 billion for the second quarter. In the first quarter, reported Apr. 19, it earned $399 million, or 18 cents a share, on revenues of $2.34 billion. If EMC misses these targets, the stock could be rocked. It has rebounded sharply from its April low of $25 -- mainly on expectations that when IT departments start cranking up spending again, EMC will be a major beneficiary.

Meantime, increasing competition in the storage arena is a nagging concern for EMC. Since storage equipment and software is such a hot market, more companies are entering the fray, hoping to grab market share from EMC by slashing prices. That could dent EMC's sales growth. The most aggressive of the entrants is Hitachi Data Systems.

MARKETING SPIN? EMC spokesman Mark Fredrickson disputes that Hitachi or anyone else is gaining ground, citing a number of analyst reports showing that EMC is actually improving its market share. He chalks up competitors' claims of making inroads to marketing spin. Shope, for one, isn't worried. Hitachi is growing fast because it's a new entrant, he claims. "I haven't seen any evidence of serious competition," he says.

Others aren't so convinced. "We are doing checks on the competitive environment and, on the margin, are a bit more concerned," Merrill Lynch analyst Thomas Kraemer said in a May 1 research note. That's because EMC's 20% growth forecast is still higher than the storage industry in general. So to meet its stated earnings targets, it has to continue to add to its position in the market.

Another worry for investors: EMC remains richly valued. At its high, EMC's price-to-earnings ratio was five times higher than the p-e of the average S&P 500 company. Now, at $34, EMC remains twice as expensive on a p-e basis. If it can grow 20% in this difficult year, the premium will seem justified. "If you're ever willing to pay a higher p-e on a tech stock, than I think EMC fills that niche," says David Sowerby, a portfolio manager at Loomis Sayles & Co., who says current prices represent an "attractive entry point for the stock."

"POTENTIAL CORRECTION." Still, if EMC's growth hits a speed bump, the stock's premium clearly won't last, and shares could tumble sharply. Don Luskin, chief executive of online investment management firm MetaMarkets.com, says a decline in EMC shares "certainly is a risk," mainly because the stock is up substantially from earlier lows. "There is potential for a correction," he says. If EMC does issue an earnings warning, the announcement will probably come very late in the quarter. For the first quarter, EMC waited to say it wouldn't meet expectations until just a week before posting official results -- its first miss in more than five years.

For now, the company is confident it will nail that magic 20% figure for the year, although it will take a 1 cent per share charge on the layoffs, which amount to 4% of the company's workforce. Many investors are optimistic that tech spending will kick in again in the second half. During its April conference call, the company said it thought IT budgets were firming up.

TIME TO BUY? Analysts who follow the company, however, don't see any concrete evidence of a rebound in demand for EMC's products yet. "My view is that demand has not gotten much better, but isn't getting any worse," says Shope.

Despite near-term uncertanties, an upside in the next few years seems inevitable. EMC is the kind of company where investors have done very well seeing the forest for the trees. And in the case of data storage, the forest has plenty of room to grow. By Amey Stone in New York

EDITED BY Edited by Alex Salkever


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