“Information technology as a broad sector has lost some steam of late. Still, some IT areas have more dynamic growth prospects than others. A prime example is the emerging field of cloud computing, which refers to the storing of digital information—documents, spreadsheets, software, etc.—not on a company’s or individual’s own hard drive but in remote data centers, from which it can be accessed via the Internet.
“One company in the forefront of this cutting-edge approach to information storage and management is EMC Corp. (EMC, NYSE). ... In its key information storage business, accounting for 76% of 2009 revenues, EMC offers a wide selection of hardware and software to store and manage digital content. Its clients include such major companies as Chevron (NYSE: CVX), Wal-Mart (NYSE: WMT), and Bank of America (NYSE: BAC). Its major product line is Symmetrix. This high-end technology enables the company to store massive amounts of data (up to hundreds of thousands of terabytes) in as many as thousands of virtual servers that work together as a team and to transfer the data online to its clients at top speeds. Other product lines are geared to mid-tier and lower-end users.
“In a further refinement of cloud computing, EMC has been pushing the concept of ‘private clouds’—where individual companies can establish specialized online data centers—and is staking out a position as the leading supplier of the requisite hardware and software. In a recent survey, technology experts predicted that by 2020 most computer users will choose to access their software applications and digital content online via remote servers rather than rely on software installed on their personal computers. ...
“It may be a few years before the business world embraces information storage through cloud computing on a large scale, since the technology still needs to prove that it is reliable and can keep data secure. But EMC has thrown its chips in the pot. In 2009 it partnered with Cisco Systems to sell and promote cloud computing and spent $2.1 billion to acquire Data Domain, developer of technology to improve cloud computing’s efficiency. And earlier this year it made two smaller acquisitions of private companies. We’d look for further aggressive deal-making in the future. The company expects cloud computing—which CEO Joe Tucci projects will be ‘the biggest wave in the history of information technology’—to drive its future growth and to revolutionize data management as companies increasingly see it as a way to cut data center operating costs.
“In addition to its core digital storage operations, EMC has two divisions that offer software to help businesses work more efficiently and securely with digital content. These segments (content management and archiving and RSA information security) together accounted for around 10% of 2009 revenues.
“Contributing the remaining 14% of 2009’s revenues was EMC’s VMware infrastructure segment, which operates through the company’s subsidiary VMware (NYSE: VMW). It is a leading provider of virtualization solutions—a fancy term for running different operating systems in isolation on the same physical computer, in effect allowing one physical machine to operate as multiple independent virtual machines. ... As of year end 2009, EMC owned 98% of the combined voting power of the outstanding common shares of VMware stock and 81% of the company’s economic interests.
“Virtualization, which is one of the technologies that underlie cloud computing, is widely viewed as the future of corporate information technology thanks to its ability to enhance performance and cut costs. An increasing proportion of companies are turning to virtual machines rather than onsite physical servers to meet their needs. The growth in this area is evident in robust growth in EMC’s VMware segment. Revenues from this segment nearly tripled between 2006 and 2009 and are 48% ahead of 2009’s pace midway through 2010.
“Financially EMC is sound. It has $3 billion in long-term debt, but with its debt-to-equity ratio at just 0.2 and with $5.8 billion in cash and cash equivalents on hand as of the end of 2009, it has ample financial flexibility to pursue further strategic growth without incurring onerous debt. And if necessary, it could raise cash by selling part of its stake in VMware. Although the company is susceptible to economic headwinds— financial results were depressed in 2009 but improved markedly as the year wore on—its leadership in areas of good IT growth makes it a good bet to generate average annual growth in the low to mid teens for at least the next several years. Shares trade at only about 14 times projected 2011 earnings, making them a nice bargain with good upside potential.”
Stephen Leeb, PhD., The Complete Investor, 11/10
