The investment thesis for EMC is approximately one half an investment in VMware and one half an investment in EMC’s information storage, analytics, and security businesses. Consider this: EMC’s ownership of approximately 80% of VMware is currently valued at $25 billion based on VMware’s recent share price; with EMC’s total market capitalization of $48 billion, the market is valuing EMC’s information storage and RSA security businesses at just $23 billion despite the company’s non-VMware revenue reaching almost $17 billion in 2012. For reference, this is a price to sales multiple of around 1.4, which is significantly lower than both Teradata and Symantec. Additionally, EMC’s PEG ratio is dramatically lower than these peers because EMC has the best of both worlds with the growth potential of Teradata with the solid profitability of Symantec.
Risks to the thesis
As with any company, EMC has its share of risks. For starters, VMware’s efforts to expand its offerings from virtualization to more comprehensive cloud services is not without risk; competitors like Rackspace and Amazon.com, Inc. (NASDAQ:AMZN) have a head start and will prove to be formidable competitors. While top line growth of 22% in 2012 is impressive, this does represent a sizable slowdown from previous years, including VMware’s revenue growth of 32% in 2011.
The demand for IT security is a bit of a double-edged sword; high-profile attacks on corporations are becoming a daily occurrence. While this highlights the importance of the products offered by RSA and drives demand, security failures have occurred in the past on RSA’s watch on more than one occasion.
Another factor to monitor is the price/volume dynamic in EMC’s core “big data” information business. Volumes have been growing faster than prices have been declining on a per unit basis, so growth has been solid in recent years. However, the continued commoditization of storage and cloud services may put pressure on growth at the top and bottom lines going forward.
EMC is a buy
After touching a 52-week low last week while the market was reaching new five-year highs, EMC has clearly fallen out of favor in the market. While there are valid concerns regarding slowing growth, the case for EMC is strong based on the combination of a compelling valuation and long-term business trends that EMC is well positioned to seize. Quite simply, data warehousing and analytics, IT security, and cloud computing are not going away. In fact, many argue that we’re just at the beginning of the information revolution, which provides plenty of room to grow in the future.
The article The Intersection of Cloud and Big Data … And Investing Opportunity originally appeared on Fool.com and is written by Brian Shaw.
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