EMC Corp (NYSE:EMC) sells the IT industry’s broadest range of information infrastructure and virtual infrastructure technologies, services and solutions. EMC products and services store, manage, protect and analyze information. As of last quarter, 67% of EMC’s total revenue was derived from storage products and service and the past five-year price to volume performance can be seen below. With the mixed performance of the company’s share price over the past five years, is the opportunity for investors through new market trends?

EMC is one of the highest rated stocks on Vuru and it can be reflected in the incredibly strong management team and economic moat. This can best be seen through an 89% increase in free cash flow generation since 2009 and an increase in net profit margins by 47% in the same period. Additionally, the discounted cash flow analysis shows the company is currently undervalued by almost 42%. This is on the basis of a market growth rate of 2.67%, a company FCF growth rate of 15% (using the 10 year average) and a discount rate of 15%.

Recent Fundamental Highlights

3Q2014 EPS Up 10% y/y Revenue Up 9% y/y to 6B Operating Expense Up 9% y/y from the prior acquisition of AirWatch Storage Revenue Up 7.4% y/y to 4.05B Buybacks Share count declined 5% y/y and has 1.6B in remaining repurchases FCF 1.3B Ending Cash 15.4B

Outlook

EMC is well positioned to benefit form a re-acceleration of storage investments as CIOs look to find competitive advantages in their IT systems. According to IDC, by 2017, IT spending on clouds will account for 17% of the total IT related spending, with an annual compound growth rate of 23.5%. More data can be found in the IDC article here. As well, positive long-term trends in global data storage growth, flash storage pricing, security, virtualization, data centers, cloud management, and big data analytics provide the company with significant revenue growth opportunities.

The company will acquire 90% of the VCE joint venture owned together with Cisco Systems (NASDAQ:CSCO). Cisco will reduce its ownership from 35% to 10%. VCE will then be consolidated within the company and the current VCE CEO will continue to run the company. VCE sells high-end converged infrastructure products designed to build private clouds quickly. Demand has been growing 50% y/y as sales now top $2B on an annual basis. When finalized, BCE will benefit from top line growth in 2015 but will be slightly dilutive to EPS. After 2015, VCE will help to contribute to VCEs earnings.

Lastly, the hybrid cloud presents a large opportunity for the company. For those who are unaware, hybrid clouds allow for a company to use a cloud service that has both public and private clouds, to perform distinct functions within one organization. According to VMware (NYSE:VMW), the hybrid cloud market could have a total combined value of 17B by 2017. IDC’s recent survey sponsored by EMC suggests that 35% of enterprises have a private cloud service, while 32% are still using traditional IT and looking to deploy cloud in the near future. In response to growing demand, EMC announced three acquisitions for its hybrid cloud strategy and released its Enterprise Hybrid Cloud solution.

Economic Moat Trend

Relative to other hardware categories storage remains healthy. Input from reseller surveys continue to indicate respondents view storage as one of the best hardware categories relative to servers, networking and PCs. EMC remains a strong beneficiary given the company’s strategic positioning (80% stake in VMware), and its broad and improved product portfolio will continue to support this.

The high end of the storage portfolio (VMAX) was refreshed in mid year and is expected to be refreshed again in the second half of the coming year. EMC noted that 1Q2014 was a low point in the product cycle and it continues to execute generally well across a very broad portfolio of products and solutions.

Storage has been a strong point and product refreshment should continue to drive margins. The past 10 years of net profit margins can be seen below. Expect the company to continue to be able to grow the bottom line in the coming years.

Major Risks

With the global economy continuing to show only limited growth, or in some places like Europe, declines, the biggest risk to technology spending is the limited desire of firms to spend incremental money. China has been the power behind global growth and there are concerns that a slowdown there will have a negative impact across the world. EMC has a broad and deep bench of products, but if the architecture of choice for the cloud is commodity hard drives and not storage arrays, EMC will suffer. Under the radar, VMware has been one of EMC’s drivers. VMware is driving cloud solutions, but if its solutions do not catch on and if the core server virtualization products become more mature, then EMC will lose this growth catalyst.

Investment Rationale.

EMC is focused around creating a well-positioned strategy. With a broad and competitive product set across all price points and quality levels, the company has achieved this goal. They are the number one storage vendor globally with over 30% market share and are poised to continue being a leader. They also are well positioned to benefit from an eventual reacceleration in storage investments as CIOs refine their strategies around cloud, big data and new architecture investments.

EMC currently trades at $30.33 (closing price as of Dec 6th with a P/E ttm of 24.38) and provides upside from current levels over near to medium-term as storage segments continue to outperform and market shifts lead to increased demand.

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