For how long can EMC take this heat before E from P/E starts to disappear
EMC sells more software with its hardware than anybody else in the storage industry. Software, for example, accounted for nearly 50% of EMC's gross margin in its MRQ despite accounting for only 25% of storage sales. Nobody, I repeat, nobody else in storage has this kind of margin leverage.
The better question is how long can its rivals withstand the competition before they have to regroup again. The enterprise storage market is a risk-averse market so those unsettling changes in strategy can cause a vendor to miss significant procurement cycles measured in years.
For example, EMC forced IBM to change its storage strategy at least 5x during the last 6 years and IBM is still wrestling with its storage strategy. Sun has changed its storage strategy at least 4x during the last 6 years while putting on a brave front.
Sure, EMC is competing against deep-pocketed competitors like IBM, Sun, HWP, Compaq, Dell and Hitachi which can theoretically afford to absorb those losses indefinitely, but that's a dubious strategy because no amount of creative accounting can keep key management and technical talent from leaving a company with a weak storage strategy. Already, an inordinately large number of storage networking start-ups are populated by key refugees from IBM, Sun, HWP and Compaq. You won't find storage guys defecting to server start-ups because there are no server start-ups.
Remember the well-known trend is that storage already accounts for more than half of the server-storage IT budget and it is expected to account for more than 75% of the server-storage budget by 2003.
The shrinking mainframe market provides some useful insights:
S390 Mainframe Market
1990-2000
1990 2000
S390 Mainframe ~$13.4B ~$1.2B
Mainframe Storage ~$ 8.0B -$2.5B
Storage to
Mainframe Ratio 0.60 2.10
Put another way, the most mature computing platform still brings in $2 in storage revenue per mainframe revenue dollar and approximately $6 to $8 in software revenue per mainframe revenue dollar.
SERVER-STORAGE COMPARISON
Budgetary Percentages
Server Storage
1996 75% 25%
1999 50% 50%
2003 20% 80%
Source: IDC, Forrester, Gartner, META
By the way, book value analysis tends to seriously undervalue software businesses. When applied in a relative vacuum, it is nothing more than the substitution of numbers for substance. Most useful with conventional cyclicals in relatively mature industries. Practically meaningless in valuing growth cyclicals like EMC. |
