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Technology Stocks : EMC How high can it go? -- Ignore unavailable to you. Want to Upgrade?

To: Uncle Frank who wrote (14266)	5/23/2002 6:23:44 PM
From: Gus	Read Replies (2) \| Respond to of 17183

Yawn. You're splitting hairs. For all I know, they could be counting second hard drives and r/w cdroms in the mix. You mean IDC and Gartner are counting r/w optical drives in their external disk storage numbers? Wow! Stop the presses! The only positives right now are their ability to maintain gross margins, and their current, as opposed to projected, market share of the nas sector. NTAP's ability to maintain gross margins comes from their asset-light manufacturing model which outsources most of subsystem assembly to contract manufacturers like Jabil, which, in turn, thrive by operating with 10% or so gross margins and running only a handful of system designs at very high volumes. The critical assumption you're making is that this asset-light manufacturing model is good enough for NTAP to compete with EMC, IBM and HDS (including HDS/Sun and HDS/HPQ) in the high-end market -- the 20% of the market that may account for 80% of industry revenues and a low-volume, high-margin business. The other critical assumption you're making is that NTAP's asset-light manufacturing model is good enough to keep up with Dell's asset-velocity manufacturing model where its suppliers generally finance Dell's working capital. On both counts, it is not. When/if IT spending returns, that combination should result in some powerful increases in both top and bottom line. What did I just show you? SANs have grown faster than NAS during the last few years because the market is clearly moving in the direction of those vendors who have coherent SAN and NAS solutions yet you are basically saying that because of its ability to maintain gross margins, a NAS-only vendor like NTAP is going to continue to grow once spending resumes. EMC, Compaq and IBM already control 70% of the entire networked storage market. Dell and the 3 Stooges (HDS, Sun, HWP) control another 10%-15% so where is NTAP's growth going to come from? Or more realistically, what kind of growth can you expect NTAP to generate from the 10%-15% of the market that is left even if you assume 20%-30% annual growth? Again, the useful rule of thumb is that only 20% of the industry accounts for 80% of industry revenues. The other side of that is that 80% of the industry accounts for ONLY 20% of revenues. My contention is that this 20% is currently voting their dollars in favor vendors with coherent SAN and NAS strategies YET you are insisting that because of its ability to maintain gross margins, a NAS-only vendor like NTAP will continue to keep up with those vendors. How does one argue with a bleeping' leap of faith like that?<g> I find EMC's steep drop in gross margins to be the most disturbing aspect of their decline. Quantitative metrics do not necessarily move in lockstep with qualitative metrics like competitiveness. I'd be concerned if the deterioration of EMC's gross margins was accompanied by a deterioration in their competitive positioning. But their competitive positioning has strenghtened as indicated most clearly by their continued gains in software. I take it you would prefer that a vendor's competitive positioning deteriorates so long as they continue posting good gross margins? LOL. See the fable of WDC. The other thing that concerns me is their unholy alliance with IBM and Hitachi for a new standard. That type of arrangement leaves them no barrier to further encroachment by their two largest competitors. Huh? Try to figure out the distinctions between the management layer and the functional layer. Standards are being developed at the management layer. These standards do not dilute the very serious barriers to entry at the functional layer. In fact, the 1999 cross-licensing agreement between EMC and IBM was tacit acknowledgement by IBM that while they collect more than $1.5B a year in royalties from the largest patent portfolio on the planet, they still needed access to EMC's storage-centric patent portfolio in order to be competitive. You see these barriers to entry in the functional layer most clearly in the critical area of replication. EMC controls 55% of this key $1.1B storage software market. The closest competitor has something like 8%-9% of the market. And no, they're not counting optical drives in those numbers too.<g>