Reading research reports, to try and decide which company has a sustainable competitive advantage, isn't likely to give a definitive answer. IMO, the thing to do is follow gross margins, and see who is able to maintain market share without sacrificing margins. That will tell you what the collective decision of their customers is, about who has (relatively speaking) pricing power.
When I started buying NTAP and EMC, I thought EMC was the safer company, with the brand name, whose numbers would hold up better in a difficult macro environment. I thought NTAP was the more speculative play. But, so far, it looks like the other way around. The direction their gross margins is going in, is a startling contrast. And the market is beginning to treat their stocks differently. So, I will probably sell my EMC, slowly on rallies, and hold onto my NTAP. I'll continue to hold both, but have a tighter grip on my NTAP.
That's a good assumption, but I'm not going to just look at gross margins and then conclude NetApp must have stronger competitive advantages. I want to know why GM for NetApp are still in the mid-50s (i haven't verified this)
I think one reason EMC's margins are so low is because they truly thought they were not going to be effected by this downturn. People *had* to have storage, right. So EMC wasn't slowing production and this could be a reason why margins have dropped to the 30s range.
Another thing that could be effecting why NetApp is doing better than EMC, is that NAS storage is cheaper and in this tech depression, companies are looking to cut costs. That's an advantage for NTAP.
In addition, even in a commoditized sector like PCs, the best company, Dell, seems to have a sustainable competitive advantage. I've been expecting other companies to copy the Dell methods, in selling and manufacturing, but, year after year, no one seems able to do it, in spite of the fact that everyone knows the Dell Method is better, and vast efforts have been spent toward trying to copy it. I'm gradually coming around to the belief that, even in a commoditized sector, the best company can be a good investment.
IMO, the track record of storage is that, the only companies who succeed, are those who are focussed on the sector. Conglomerates, who do storage in order to have a complete product line, their track record isn't very good. EMC has beaten them, over and over. I'm betting they will, again. It's the smaller upstarts with a different approach, like NTAP, who are the most serious threat to EMC.
The reason Dell worked so well was because PCs decline in price very rapidly, and Michael Dell's business essentially cut that risk out of the business. When it comes to selling servers or storage, EMC and Sun don't ship their products to BestBuy and then have them sit in the shelf for 2 weeks as prices decline.
Dell has been very successful at selling a commodity (they are twice the size of Sun!). Nokia, in a way, is the same. Margins for Ericsson and Motorola are terrible, while Nokia makes a pretty good profit. Many people predicted Nokia's margins would come crashing down. Or the Asians would take market share, but that just hasn't happened. I think that could be because Euroland has pushed GSM technology very hard and GSM is basically a Euro technology. Acatel, Nokia, Ericsson, Siemens, Motorola...all have IP on GSM. This locks out the Asians.
Interestingly, they also said that pricing pressure was greatest in software and DAS, and least in NAS and SAN. That's good news for NTAP, and may explain why NTAP has managed to keep gross margins up, better than EMC.
Hmm..software was facing pricing pressure? What's DAS? |
