EMC Corporation (EMC), VMware, Inc. (VMW): The Intersection of Cloud and Big Data … And Investing Opportunity

EMC Corporation (NYSE:EMC) is usually thought of as an information storage provider. While information storage still represents two-thirds of the company’s revenues, EMC touts its competitive position at “the intersection of cloud and big data.”

Not only does EMC offer a broad portfolio of enterprise storage solutions including backup and recovery, but the company also has leading information security technology through its RSA subsidiary and virtual computing technology through its majority ownership in VMware, Inc. (NYSE:VMW). In combination, EMC’s businesses provide a unique and comprehensive set of solutions to store, access, and analyze data securely both in the office and in the cloud.

EMC Corporation (NYSE:EMC)The Investment Thesis

Enterprise information technology demands continue to grow worldwide. This includes increased storage needs, the ability to analyze data to drive better business decisions and improve efficiency, security and compliance software to protect critical systems and information, and the ability to access information remotely through virtualization technology. EMC Corporation (NYSE:EMC) has leading products in each of these categories, which provides diverse streams of revenue and the competitive advantage of being able to integrate these products and bundle them to customers.

With a successful suite of products and a growing market opportunity driven by the ongoing information and mobile computing revolution, EMC is in a fantastic position to continue to grow into the future. To make the thesis even more compelling, EMC trades at a bargain valuation compared to its peers as summarized below:

EMC VMW TDC SYMC RAX
CAPS rating (out of five stars) 5 stars 4 stars 5 stars 3 stars 3 stars
Share price $23.25 $73.55 $58.56 $23.70 $56.11
Market capitalization (in billions) $49.0 $31.5 $9.8 $16.3 $7.7
Revenue (in billions) $21.7 $4.6 $2.7 $6.8 $1.3
TTM Price to sales ratio 2.26 6.84 3.64 2.40 5.87
TTM Price to earnings ratio 17.93 42.76 24.00 15.20 74.81
Forward price to earnings ratio 12.50 20.10 16.64 12.33 42.19
PEG ratio 0.94 1.05 1.34 1.65 1.93
Free cash flow yield 10.2% 5.3% 4.3% 10.4% 1.6%
Debt to equity ratio 0.07 0.08 0.15 0.41 0.10
Net cash* on balance sheet (in billions) $4.5 $1.2 $0.5 $1.1 $0.2
* Net cash defined as cash plus short term investments less long-term debt
Sources: Motley Fool CAPS and Yahoo! Finance – March 2

Peer comparison

While no company has quite the unique suite of businesses as EMC, pure-play data warehouse and analytics provider Teradata Corporation (NYSE:TDC), security provider Symantec Corporation (NASDAQ:SYMC), and cloud computing operator Rackspace Hosting, Inc. (NYSE:RAX) provide some context on how the market values businesses in this sector.

It is well known that the growth potential of cloud computing has driven prices of companies like Rackspace and VMware to sky-high multiples. However, VMware, Inc. (NYSE:VMW)’s share price has stumbled to 52-week lows on concerns regarding slowdown in licensing and revenue growth of “only” 22% during 2012. From a valuation standpoint, VMware stands out over Rackspace in terms of free cash flow generation and PEG ratio (which is based on analysts’ growth estimates).