TheStreet.com's Seymour loves storage
The Explosion in Storage Has Only Just Begun
By Jim Seymour
Special to TheStreet.com
10/26/00 1:24 PM ET
I give about 40 speeches a year, and I've often said that the talks before and afterwards and the Q&A are, at least for me, often the best part of these appearances. Last week I spoke to 150 institutional investors at a conference, and afterwards I had a chance to sit down with an old friend who was there, someone I hadn't seen for several years.
The talk moved almost immediately to the market, of course, and then to specific stocks, and then to sectors we thought were hot and going to get hotter. I wasn't a bit surprised when my friend agreed immediately with me that storage companies are going to continue to emerge over the next couple of quarters as very hot stocks, indeed... and may, viewed in hindsight from five years out, be the tech companies with the fattest gains in their stock prices.
By "storage," of course, I mean magnetic storage of data. As companies' warehouses of data grow (and are increasingly being probed by data-mining software), and as both the public and private corners of the Web continue to grow, the demand for storage is going through the roof. The kinds of data we're using now also increase storage demands, sometimes exponentially: video, MP3 music and digital images of all sorts.
How big is the market? Say, $30 billion today -- but maybe as much as $100 billion in five years. Think that's impressive? Industry experts think total annual storage capacity sold will increase by 50 times over that period, as demand grows, disk-density increases sharply, and prices tumble.
Won't that hurt margins? It hasn't so far. Industry leader EMC (EMC:NYSE - news - boards) has gross margins around 58%; Network Appliance (NTAP:Nasdaq - news - boards) hits 65%. That, despite aggressive pricing. (Though certainly new competition from the likes of Dell (DELL:Nasdaq - news - boards) will lead to some erosion in gross margins. Dell CEO Michael Dell likes to tweak EMC's nose by calling it "Excess-Margin Corporation," and points out that Dell does very well with far smaller gross margins.)
To understand what's going on in storage, let's look first at technology, then in my next column we'll look at some specific companies, and at a sample storage portfolio I've assembled.
This explosive growth is being pushed most fundamentally by two important architectural changes in how companies buy, position and manage their storage assets, and also by a group of upstarts that want companies to see storage as an outsourced function.
In one major change, today's thinking increasingly demands separating data-storage devices from the servers that manage and control that data. By getting away from stuffing servers full of large hard disks in RAID (redundant arrays of inexpensive disks) arrays, and instead grouping storage capacity in "server farms," which may or may not be physically proximate to the servers controlling and accessing them, companies gain better performance and, at least arguably, better data integrity, greater security and lower costs.
This has created riches for companies that produce storage subsystems for this so-called SAN, or storage-area network, approach. The leader of the pack, the highest-profile storage company, is EMC, but Compaq (CPQ:NYSE - news - boards), Hewlett-Packard (HWP:NYSE - news - boards), Sun (SUNW:Nasdaq - news - boards), IBM (IBM:NYSE - news - boards), Dell, and a few others are also players in storage.
This separation of data-storage from servers is also what has driven Brocade (BRCD:Nasdaq - news - boards), for example, to its current stratospheric levels, thanks to Brocade's dominance in the fibre-channel tools and technology needed to ensure rapid, accurate transfer of data among all these devices. Qlogic (QLGC:Nasdaq - news - boards), Adaptec (ADPT:Nasdaq - news - boards) and a few more are also in that corner of the business.
The second big change is toward the inverted acronym, NAS, which stands for network-attached storage. Today, NAS is generally seen as a quick, easy and relatively inexpensive way of adding small-to-mid-scale storage capacity to networks. In theory -- and in fairness, often in practice -- NAS devices are a 30-second plug-and-play addition. Cobalt, recently acquired by Sun for $2 billion, was a pioneer in NAS in the larger market, along with Network Appliance. Quantum (HDD:NYSE - news - boards) is also a player.
Finally, a group of new outsourcing players, called SSPs, or storage-service providers, are building their own independent "storage farms," then renting out that storage capacity to companies that would prefer to stay out of the hardware business. Their claim: By building clusters of storage units, they can achieve lower costs and greater reliability and can deliver fast, cheap, quickly-expandable storage to their client companies.
StorageNetworks (STOR:Nasdaq - news - boards) leads the pack among SSPs; other players include privately held ScaleEight and, aimed at smaller businesses and individuals, iDrive.
Next up, tomorrow: Some key players, and a "Storage Portfolio" to allocate investment dollars in this rich game. |
