EMC versus NTAP / Fool article
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EMC vs. Network Appliance
A future storage battle?
New optical technologies are making the Internet faster, more robust, and more reliable -- which means there will be more and more
data that must be stored. Data storage leaders EMC and Network Appliance stand to benefit from this trend. While both companies
have their core markets -- EMC on the high end and NetApp on the low end -- the two will increasingly battle one another in the
middle market of storage solutions. A better value proposition appears to give NetApp the upper hand.
By Matt Richey (TMF Verve)
August 21, 2000
If you haven't seen it yet, this month's Forbes ASAP is devoted to the all-optical network of the future. Pretty interesting stuff,
especially The Race for Fiberspace, comparing the optical efforts of Cisco Systems (Nasdaq: CSCO), Nortel Networks (NYSE: NT),
and Lucent Technologies (NYSE: LU). What does all this mean? Our current Internet of electrons on copper is slowly but surely being
replaced by a new Internet of light on glass. Data traveling on fiber optic cable at light speed will produce bandwidth a-plenty. And,
with immense bandwidth will come the need for immense storage.
Over the past few months, I've written a couple of times about EMC Corp. (NYSE: EMC), the big dog in data storage. (Story links at
bottom.) EMC has a $213 billion market value, $7.1 billion in trailing revenues, and a blue chip client list. EMC's focus is on the
upscale Storage Area Network (SAN) segment of the market.
SANs are distinguished by super-fast speed (typically fiber-based) and superb "five 9s" reliability (that's 99.999% uptime, or 5
minutes of downtime per year). EMC sells these SAN systems to Fortune 500 clients that demand the ultimate in speed and reliability
for mission critical storage needs. Of course, such sterling technology comes at a price -- typically more than a million bucks for an
average EMC system. There are less-expensive alternatives, however.
Up-and-comer Network Appliance (Nasdaq: NTAP) offers a less-sophisticated, though very capable, storage technology at a much
lower price point. It's called NAS or Network Attached Storage.
Compared to SAN, NAS is not quite as fast because it utilizes the office LAN (local area network) rather than a dedicated fiber
network. Also, it's not quite as reliable, typically achieving uptime of 99.9% (which translates to 8 hours of downtime per year) or
99.99% at best (1 hour of downtime per year). The upshot is that a NetApp storage solution runs for only about $80,000, a bargain
compared to EMC. Thus, for many customers, especially small and medium-size businesses, the NetApp "filer" is the storage solution
of choice. As such, NetApp has garnered a market value of $34 billion on $707 million in trailing annual revenue.
Here's a side-by-side comparison of these two companies on our six Rule Maker financial criteria:
(Trailing 12 months) EMC NetApp
Revenue Growth 26.2% 110.9%
Gross Margin 56.6% 60.0%
Net Margin 17.8% 13.1%*
Cash MINUS Debt 2,314M 437M
Foolish Flow Ratio 1.76 1.30
Cash King Margin 13.8% 16.7%**
(* Pro Forma)
(** Estimate)
As you can see, both companies have excellent financials. NetApp is growing revenues faster, but off of a much smaller base.
Interestingly, NetApp also has the lead on gross margins, though only by a smidgen. Moving down the list, EMC has a higher net
margin and more net cash (cash minus debt), but NetApp controls its cash better, as measured by its lower Flow Ratio and higher
Cash King Margin. All in all, two impressive sets of financials, two impressive companies, and maybe two continued success stories.
As of yet, EMC and NetApp are not direct competitors.
But, that may change in the next few years. As storage technologies evolve, it appears that NetApp and EMC will eventually address
overlapping markets. The question is, which company is better positioned to win?
I've been reading up on both companies, and I think NetApp is ultimately better positioned to gain market share. I mentioned that
NetApp's NAS systems run over the office LAN. Right now, that handicaps an NAS system's speed. But, in the next couple of
years, office LAN Ethernet technology is expected to make enormous jumps in speed -- as in a 100x increase over current speeds.
Matt Tompkins, Soapbox author of Ten Companies That Will Rule the World, explains it as follows:
"Both NAS and SAN have their strengths and weaknesses. SANs, for instance, have a speed advantage over NAS because they
operate on a separate and (at present) faster Fibre Channel network, while NAS uses the existing LAN Ethernet technology. This
difference will become less of an issue as companies begin deploying separate Ethernet storage networks operating over higher gigabit
technology, which is 10x faster than the present system. There is also growing awareness of the coming of 10-gigabit Ethernet, likely
two years away and another ten-fold increase in speed. Using an Ethernet-based storage network costs only a fraction of a similar
Fibre Channel offering. This will be a significant boost to the NAS value proposition and increases its prominence in enterprise
storage architecture."
So, as LAN technology improves, NetApp's storage solutions will increasingly approach the capability of EMC's more-expensive
offerings. That should give NetApp the edge as the two companies begin to compete for middle-range storage systems.
Let me be clear that both companies have their core markets -- EMC on the high end and NetApp on the low end -- and both of these
segments are experiencing dramatic growth. There's room for more than one victor in the storage space. Even so, NetApp appears to
me as the better-positioned company for growing rapidly and creating the most shareholder value from here. |
