Storage Companies Still Smiling as the Bits and Bytes
Keep Piling Up
By Thomas Lepri
Senior Writer
1/28/01 1:30 PM ET
(luigi, I posted the full article from your URL because it is esp relevant while STORAGE conferences are this week, plus AJ Cohens' positive statements this weekend on storage, not that she has nearly the power she used to;-)
Internet commerce. Personal computers. Unix servers. Telecom equipment.
It's getting harder and harder to find a sector that hasn't been ravaged by
slowing growth.
And then there's storage. As company after company is forced to lower its
guidance for 2001, enterprise storage names like EMC (EMC:NYSE - news),
Network Appliance (NTAP:Nasdaq - news) and Veritas (VRTS:Nasdaq -
news), along with storage-network switch makers like Brocade
(BRCD:Nasdaq - news) and McData (MCDT:Nasdaq - news), still claim that
growth is showing no signs of abating.
But as the number of credible hypergrowth stories gets smaller, the stakes
get larger.
The main evidence that the storage business is still booming comes from
customers, who have indicated that, despite the uncertain environment, the
percentage of their budgets allocated to storage remains unchanged. But
there's a logic behind that evidence that makes the story still compelling.
There are a lot of areas where IT managers can pare back or delay purchases.
With T1 network lines doing more to ease bottlenecks at workstations than
microprocessors ever could, employees will do just fine using their Pentium
II machines for six more months. Windows 95 may be crashing every 45
minutes, but the Windows 2000 deployment can wait another quarter as long
as the workers can be persuaded to lay off Napster. As for servers, even a
slower-than-optimal network can be tolerated if budgetary discipline demands
it.
But no matter what you do, the data just keep piling up.
"I'd never say we're bulletproof," says John McDonnel, chairman and CEO of
McData, which spun off from EMC last year. "But we talk to a lot of
large-enterprise customers, and they say that the expansion of their storage
capacity is just not an option. They just have to do it. They gather information
every day and need more access and availability."
McDonnel's is the dominant perception of the storage industry on Wall Street
right now. And ironically, that sense of the relative immunity of storage to the
problems so many other tech companies are facing may have made the
storage group one of the most dangerous sectors around. Even with the
spirited selling of the past few months, valuations in that sector remain at
heights that seem anachronistic against the backdrop of 2001's supposed
return to fundamentals. Because of that, sudden news of significantly slowing
growth at any storage company will be judged extremely harshly.
Last of the Hypergrowth Stocks
Company
Forward
price-earnings
ratio
Estimated
2001 sales
growth
Estimated
2001
earnings
growth
Brocade (BRCD:Nasdaq -
news)
164
159%
121%
EMC (EMC:NYSE - news)
74
34%
30%
McData (MCDT:Nasdaq -
news)
121
44%
47%
Network Appliance
(NTAP:Nasdaq - news)
137
93%
95%
Veritas (VRTS:Nasdaq -
news)
106
45%
48%
Source: First Call
Investors have learned that the bad news is always sudden. The unfortunate
truth of the matter is that discretionary spending and nondiscretionary
spending are not, as many have treated them, discrete and immutable
categories. It's one thing for customers to say that they don't plan to cut back
on spending. But when budgets come under review, even if a corporation can't
afford not to invest in storage capacity, its pricing can become important.
The fears aren't outlandish. On its recent earnings conference call, EMC
indicated to analysts that gross profit margins could decline by as much as a
few percentage points in 2001. Network Appliance lost more than 15% of its
market cap last week on fears that it is starting to feel pricing pressures. The
increasing competition in the storage market -- deep-pocketed purveyors of
Heavy Iron like Compaq (CPQ:NYSE - news), Hewlett-Packard
(HWP:NYSE - news) and IBM (IBM:NYSE - news) are all piling into that
high-margin business -- can only amplify the problem.
"Time will tell," says George Elling, who covers the storage industry for
Lehman Brothers. "The demand for storage is phenomenal right now, so at
least they have a cushion. If budgets get cut a lot more, there's a question of
what projects get deferred. Storage certainly wouldn't be immune. For the
time being, it's one of the projects that you need to get done."
"Storage will grow regardless of economic expectations," says McData's
McDonnel. "The only question is how fast."
The only question, indeed. |
