EMC, NTAP, and the Innovator's Dilemma:
(repost from EMC thread; my response to Apollo)
1. First, I'm not that sure of my conclusion, (that as EMC's and NTAP's markets converge, EMC will remain the dominant storage company), and I'm willing to be convinced I'm wrong. And I'm not really competent to analyze the technical details. Please correct any errors of facts or logic you see below.
2. By NTAP's discontinuous innovation, I presume you mean WAFL. The consensus seems to be that WAFL is better at what it does (whatever that is) than anything anyone else has been able to come up with, and other companies have tried repeatedly in the past. That's good for NTAP, very good. However, you don't need WAFL to enter the NAS market. That is the crux of my worry about NTAP.
2a. from one of DS's posts: "Why is this technology (WAFL) disruptive? It is disruptive because users of this technology enjoy faster, simpler, more reliable file services, compared to traditional UNIX and Windows file service solutions. These advantages are a direct result of NTAP’s patented innovations and can only be met by competitors who create similar innovations." So, WAFL is a better mousetrap. The best mousetrap today, for those mice. And you can't use WAFL without paying NTAP. But......is WAFL an industry standard, with overriding reasons to continue using it, even if someone else came up with a better mousetrap, like everyone uses MSFT's OS even though everyone thinks Apples's OS is better? No, it isn't. "Faster, simpler, and more reliable" isn't enough to equal a Gorilla's bte.
3. WAFL means that NTAP's NAS products are better and cheaper than EMC's. Great. So, the superiority that NTAP has is in the quality and price of their product. But...... that is not enough. Any rapidly growing market with high margins will attract competition. And it will keep on attracting competition, over and over, unless the "first mover" can defend his space with patents and copyrights. Like a drug company can defend their market for a drug. Like QCOM gets royalties from anyone who wants to do anything in 3G. But EMC is not paying royalties to NTAP.
4. I'm worried that NTAP is going to go the way Netscape went. When browsers got important enough to attract Microsoft's attention, Netscape owned the space. The first (and second, and third) of MSFT's attempts failed. But MSFT has a huge mountain of cash, and a huge cash flow. They had the resources and will, and they never give up. Never. They just kept large teams of the smartest software people on the planet working on version after version, until they had a winner. And they had the resources to compete on price (to the point of giving it away free), till Netscape was defeated. BTW, I don't believe in the "first mover's advantage." Too many counter-examples.
5. It is precisely during downturns that the strongest get stronger. I remember, going into the 1998 downturn, Novellus had superior copper technology. AMAT was behind. But AMAT is bigger, and has a bigger R&D budget. Their smaller and weaker competitors had to cut back a lot more, when no one was ordering semi-equip. So, AMAT could use that downturn just as they have used previous downturns, to catch up. Today, AMAT's copper tools, from what I read, are as good as anyone's. And they are gaining market share in other niches, as well. It is a consistent pattern: when times get tough, cash and cash flow allow the strong to get stronger, and smaller companies lose their grip on their niches.
6. The relationship between NTAP and EMC, is similar to that of AMAT and NVLS. That is, any niche NVLS is in, AMAT can enter it, by buying small companies when assets are cheap, or developing in-house. And AMAT always has more resources than the competition, to throw at any niche they have targeted.
7. EMC has targeted NAS. They have the will, and they have the resources. EMC will spend 1B for R&D in 2001, 70% of that for software. That's more than NTAP's total sales (TTM). NTAP has 530M in cash, but EMC has 2.7B. EMC's sales are almost exactly an order of magnitude larger than NTAP's. EMC has a market cap 10 times that of NTAP (about 90B vs. 9 B). And, although they are at the same P/S ratio (about 10 for both of them), EMC's P/CF is about twice that of NTAP (48 vs. 94). NTAP will not out-grow EMC in this current downturn, fast enough to change those numbers much. Conclusion: in a battle for market share, it is like INTC vs. AMD, a mismatch.
8. EMC is not like Xerox or Sears or IBM, whose LifeStage is MatureAdult. EMC is not a huge unwieldy rigid complacent behemoth, that is unable to meet the challenge of a (initially) smaller competitor with a BetterWayOfDoingIt. EMC is more like MSFT and INTC. Both those huge companies have recently demonstrated they still have the ability to "turn on a dime", when they see that the ground is shifting under their feet. In terms of its StageInLife, I would say that NTAP is an Adolescent, and EMC is a YoungAdult. YoungAdults are the best at defending their turf and invading new turf. They are big enough to be strong, and still young enough to be supple. The perfect age.
9. So, for the moment, I'm leaning toward investing in EMC. I took a partial position in EMC at 50 (the falling knife hurt). Neither stock, however, looks like it has hit bottom. The bottom won't be till sentiment on NTAP and EMC is at least as bad as it is now for CSCO and NT and LU. Visualize that. I'll buy more EMC at around 30 (LEAPs, probably, especially if the 2004s are available), and not be fully invested till 20. Yes, it could get that low. At a price of 20, EMC's trailing PE would be about 25, which is not unreasonable. NTAP, as a smaller and less well known company, and more dependant on dotbombs for sales, will probably continue to see their valuations compressed more than EMC's. |
