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Dumping some storage
EMC and Network Appliance have much in their favor, except rich valuations and lots of competition.
February 25, 2003: 1:40 PM EST
By Paul R. La Monica, CNN/Money Senior Writer

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NEW YORK (CNN/Money) – On the surface, stocks of so-called storage companies like EMC, Network Appliance and Veritas Software look like great buys.

Earnings growth? Check. The three are all expected to post earnings increases in 2003 and 2004 after reporting either lower profits or, in EMC's case, a loss in 2002.

Improving prospects? Check. Not only is EMC (EMC: Research, Estimates) expected to post sizable gains in earnings this year, but analysts have upped their estimates substantially over the past few months. Estimates for Network Appliance (NTAP: Research, Estimates) and Veritas (VRTS: Research, Estimates) have also risen slightly.

Solid institutional support? Check. According to data from FactSet Research, big mutual fund shops including Fidelity, Capital Research and Wellington Management were net buyers of EMC in the fourth quarter. Alliance Capital, State Street and MFS increased their stakes in Network Appliance. Dreyfus and Janus bought more Veritas in the fourth quarter.

Expensive storage space
Pure play storage stocks trade at a premium to tech giants with more cash.
Company P/E* Cash  
EMC 70.5 $2.6 billion 
Network Appliance 36.6 $500 million 
Veritas Software 28.3 $2.2 billion 
Microsoft 23.9 $43.4 billion 
Cisco Systems 24.4 $21.2 billion 
Oracle 27.2 $5.5 billion 
 * based on calendar 2003 estimates
 Source:  Thomson/Baseline

Attractive valuations? Che -- Oh. Wait. Investors, we have a problem. Storage companies are no longer cheap by any means. The stock prices may be a lot lower than they were in 2000 but investors have once again bid up the shares to dizzying heights.

Shares of EMC have already surged more than 25 percent this year and trade at 70 times 2003 earnings estimates. Network Appliance, up almost 10 percent this year, has a P/E of 37. Veritas, which has increased 12.5 percent year-to-date, trades at 28 times estimates.

Remember the titans

Now don't get me wrong. Despite the collapse in IT spending, storage is still a key area that businesses will eventually need to invest in. The increased flow of data that is flowing over the Web and through the networks of big corporations needs to be stored somehow.

EMC, Network Appliance and Veritas are pioneers in this area, and they'll no doubt benefit. Problem is, several tech titans have been beefing up their storage capabilities.

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Microsoft is working with Hewlett-Packard. Oracle (ORCL: Research, Estimates) is teaming up with Hitachi (HIT: Research, Estimates) to integrate Hitachi's storage systems with Oracle's database software. Cisco Systems has targeted storage as one of several key areas that it wants to expand in, and is working closely with IBM (IBM: Research, Estimates). Dell Computer is also boosting its storage presence, albeit through a partnership with EMC.

And the shares of these tech heavyweights are cheaper. Cisco (CSCO: Research, Estimates) trades at about 24 times earnings estimates for 2003, as does Microsoft (MSFT: Research, Estimates). Oracle's P/E is 27. HP (HP: Research, Estimates) and IBM have P/Es of 14 and 18 times, respectively.

Did I also mention that these competitors are heavyweights? They all have much more cash and marketing clout, which will make life tough for the pure-plays.

In one example, US Bancorp Piper Jaffray analyst Ashok Kumar warned in a research note Tuesday about how Microsoft plans to include storage capabilities in its new server operating systems. This, he reasons, will make it tougher for Network Appliance to sell its own technology to server vendors like Dell.

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Storage is no longer a niche standalone business. Veritas seems to recognize this fact, having announced two acquisitions in December that will allow it to offer customers software that monitors the performance of Web servers and databases. Such diversification should help Veritas compete more effectively against other enterprise software companies such as Microsoft, Oracle and SAP.

But Veritas and other storage companies have a long way to go before they can come close to offering nearly as wide an array of technology solutions as the Microsofts, Ciscos, and IBMs of the world do.

That's all the more reason for storage companies to trade at a discount, not at a huge premium to their larger rivals.  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.