SMARTMONEY.COM: Where You Gonna Store All
Those Bits?
By MONICA RIVITUSO
NEW YORK -- These days, storage is king.
As the Internet and e-commerce race along, companies are stuffing massive amounts of data
through network pipes. All those databases and bits of information need to be housed somewhere.
And that's where sophisticated storage devices come into play.
Storage has become one of the biggest beneficiaries of the Internet explosion. This industry's rapid
growth hasn't only fattened the balance sheets of top companies like storage giant EMC (EMC) -
which derives much of its business from providing high-end storage machines to large companies -
it has also richly rewarded shareholders.
But now, the industry's areas of growth are changing. There's a migration taking place from
standard server-attached storage to a new breed called network-attached storage. And while
leading stocks have already delivered some fantastic returns, analysts still see more upside in the
sector.
"Not everyone has recognized the opportunities there," says Chase H&Q analyst William Lewis.
For those not plugged into the storage scene, an update: For years, most storage has been housed
inside a server. Traditionally, these powerful computers have not only provided such things as
information, applications and Web pages to various computers in a network, they've also had the
additional task of storing data. With stored data growing at an unprecedented rate, however,
server-attached storage can no longer meet the capacity needs of today's companies. That's why
businesses are increasingly turning to some sophisticated alternatives to manage their vast libraries
of bits and bytes.
One approach is to add on an entirely separate storage network, called a storage-area network, or
SAN. While this technique of connecting a special high-speed network to an existing network of
users is expandable and reliable, experts note it's also quite expensive and complicated to integrate.
Another approach - and the one that's getting quite a bit of attention these days - is to simply attach
a storage appliance onto an existing network. Basically, by using something as simple as an
Ethernet cable, a separate device designed with the sole purpose of storing data can be connected
to a network. This is called network-attached storage, or NAS, and it's become one of the more
popular choices as corporations and dot-coms add storage capacity. NAS is about as close to
"plug-and-play" as you can get, says William Hurley, program manager at Yankee Group. "[It's]
effective, reliable and proven," he says.
Considered the next hot area in the storage industry, NAS is attracting the interest of everyone
from disk-drive makers to PC manufacturers. One of the reasons for this is that server-attached
storage has hit a plateau. According to Robert Gray, the storage-systems research director at
market-research firm International Data Corp., server-attached storage sales should remain flat for
the next five years. NAS, on the other hand, is expected to explode. A $1 billion market last year,
NAS sales should balloon to $6.5 billion in 2003, according to IDC.
So who are the leading players in this market? Last year, Network Appliance (NTAP) held a
dominating 49.8% of the NAS sector, according to Dataquest. But given the opportunity here,
others - such as Compaq Computer (CPQ), Sun Microsystems (SUNW) and EMC - are all
looking to muscle their way to the top.
"It's an interesting battleground," says Yankee Group's Hurley. "Part of the driver is that NAS can
address many of the capacity demands that IT managers are currently facing both in the [corporate
arena] and in e-commerce."
Earlier this month, Compaq, the world's largest PC maker, took the wraps off its first NAS
offering. Compaq executives say the TaskSmart N-Series NAS appliance is 50% less expensive
and 20% faster than a comparable Network Appliance product. The company's extensive network
of resellers should help it sell its new machine, IDC's Gray says. But Chase H&Q's Lewis says
Network Appliance still has the best-performing NAS products available.
Likewise, Sun is entering the NAS game. After attempting to crack the storage market in past
years, the company unveiled its latest attempt this spring in a storage lineup that included a
network-attached offering. The NAS product, part of the StorEdge product family, is aimed at
dot-coms and other companies with fast-expanding storage needs.
Then there's EMC. The data-storage king has product offerings in every segment of the market,
including NAS. But EMC apparently wants a greater share of the NAS pie. EMC management has
said it will unveil a new NAS product and shuffle part of its sales force to sell the machines. EMC's
18.1% market share in NAS last year pales in comparison with Network Appliance's, but EMC
executives vow the company plans to fight its way to the top.
According to Chase H&Q's Lewis, EMC's intentions should be taken seriously. Obviously,
Network Appliance enjoys an enormous lead. But EMC boasts a stellar track record and proven
technology, Gray adds, which put information-technology managers making pricey storage-system
purchases at ease.
Still, Lewis and Yankee Group's Hurley expect Network Appliance to remain the front runner in
NAS. "I think Network Appliance is in a good position and will continue to stay in the leadership
position," says Hurley. "They've taken a leadership role in a lot of areas, as far as standards and
developing new technologies for storage. But it is a market that is growing, and right now all boats
are floating."
To play the sector, Chase H&Q's Lewis recommends that investors keep their eyes on the leading
names. Thing is, these stocks are anything but bargains. Consider that shares of EMC have risen
73% so far this year - after a 157% surge last year. And Network Appliance has tacked on 140%
this year alone, after a 270% jump in 1999.
Dig a little deeper and these stocks' high prices become even more startling. EMC and Network
Appliance respectively trade at an eye-popping 124.5 and 250 times current fiscal year consensus
earnings estimates. Even taking into consideration their robust long-term earnings growth rates
(31.35% and 51.69%, respectively), that still leaves EMC and Network Appliance with
price-to-earnings-growth ratios of 3.79 and 5.08 respectively, compared to the industry's average
PEG of 1.63, according to Zacks Research. To add to the valuation concerns, EMC is only 4% off
its 52-week high of $98.62 last Friday. Meanwhile, Network Appliance is sitting 19.3% off its high
of $124 (remember though, its multiple is much richer than EMC's).
So these leading names aren't cheap. But storage is clearly a growth industry and EMC and
NetApp are considered the leading stocks for the long term. "They are expensive, but they're the
types of stocks that are always expensive," says Chase H&Q's Lewis.
Indeed, investors felt these stocks were expensive last year too, Lewis notes. But consider this: last
year at this time, EMC was trading in the $30s, while Network Appliance hovered in the midteens.
Today's prices make last year's levels look like bluelight specials.
For more information and analysis of companies and mutual funds, visit SmartMoney.com at
smartmoney.com |
