one man's opinion, of course. and given recent discussion, how's this for 'controversial': dell a laggard?
in any case, besides further bolstering one's outlook on EMC (as if you needed any more), it continues to pique my interest in NTAP. ok, 120 P/E occasionally notwithstanding even at 50+% EPS growth.
(my apologies if this has been posted, i haven't exactly slugged through all of the last 30 odd posts.)
via ms investor ...
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Posted 1/7/99
Interviews
Store this! Analyst sees bull market for data keepers
BT Alex. Brown's Phil Rueppel expects continued strength in computer storage experts like EMC, IBM and Network Appliances as explosion in networking and databases drives businesses' demand to hang onto more bits.
By Eneida Guzman
It has been an incredible four-year ride for technology stocks. But before you go pulling the trigger on all your high-priced high-tech positions, consider what one charter member of the digital cognoscenti has to say about 1999.
Phil Rueppel, BT Alex. Brown's computer-systems analyst, is convinced that the bull run for these stocks is far from over. "It's going to be a good year. And I think e-commerce and the Internet are going to be the key drivers." The veteran of 15 years in the trade believes that you don't have to look at just the Internet or Web-related software stocks to profit from growth of the wired world. "Investors should also look to the traditional systems companies that are going to innovate change and benefit from that new arena," he told Investor.
Always interested in getting a good tech tip, we questioned Rueppel about the hardware, storage and disk-drive groups, and got the maven's outlook for 1999.
The computer systems sector has had a great run over the past four years. The odds of the sector maintaining this type of momentum are diminishing by the day. What's your outlook for this year?
Business is very, very strong. And I expect that this will continue to be the case for 1999. We're seeing a pickup in sales of the PCs driven primarily in the U.S. and through the retail channels. The sub-$1,000 PC appears to be catching on strongly, though we are also seeing strength in the commercial sector both for PCs as well as the larger servers. Those could be PC servers coming from Dell Computer (DELL) or Compaq Computer (CPQ) or even the larger Unix servers coming from Sun Microsystems (SUNW) and Hewlett-Packard (HWP). The applications we're all using are more data intensive and many of us are starting to plug into the Internet. All of that requires a lot more storage resources, so it's not a surprise that we're also seeing pretty good strength in the system storage companies like EMC Corp. (EMC) and Network Appliance (NTAP).
Who in particular does well out of the gate for the coming year and why?
My perspective is that the companies with strongest fundamentals are the ones that are also going to have strong stock performance. Even though companies like EMC, IBM (IBM) and others have had very good performance last year, I think they can do well this year also.
What will be the key themes driving stock performance this year?
The key themes that we're looking for next year to drive stock performance are in the infrastructure of the Internet (and) who will provide core technology to enable electronic commerce, to enable the more rapid transmission of data to the home, to the business over the Internet. I'm expecting a lot from companies that are squarely focused on solving problems in that arena. EMC, as I mentioned, provides large storage subsystems to store more data. They stand clearly ahead of all their competitors in providing good solutions. Sun Microsystems is also a company that has found itself squarely in the middle of very important Internet technologies like Java and their new product, Jini. The whole company has been focused on providing a network Internet or intranet solutions to its customers and I think they'll continue to do well at it. IBM is a services organization that, in my view, is unparalleled and is the envy of many of its competitors in the industry -- and with that service, experience and capacity, it's my belief that they can leverage their knowledge about Internet solutions and continue to grow their business going forward.
In your research you mention that the present IBM "is not your father's IBM." Can you explain that?
Yes, it's a take-off on some catchy advertising slogan. I think many people look at IBM sort of as a mainframe company or the company that was dominant back in the 1960s and '70s and then really lost its way. I tend to look at it as a company that didn't really lose its way but just didn't really adapt as rapidly as others to what became a proliferation of client-server architectures. But now we're finding out that they know how to construct client-server systems and that more and more customers are coming back because they value the large-system expertise that IBM has. Another important thing to know about IBM is that they've really changed their attitude toward providing open solutions, which is much different than the way they did things 10, 15 or even five years ago. My target price on IBM is $220.
You believe that the electronic-business theme will solidify IBM's focus and expand its price-earnings multiple. E-business is a subject that is near and dear to all of our hearts. To what extent can we expect price-earnings multiple expansion for IBM because of this?
Multiples tend to be a matter of philosophical debate, especially as you move into the Internet space and for some companies it's quite difficult to use a multiple of anything to understand valuation. Traditionally, IBM has been compared to other computer systems companies like Hewlett-Packard, the former Digital and Unisys (UIS). But none of those companies has really had the same kind of focus on the Internet and potentially, at least in my view, the same ability to generate profits from the Internet. If you look at who runs the back offices of major companies and which vendors' customers trust to do transactions, IBM is either on the top of the list or very close.
As we move toward more complex business-to-business transactions or even consumer transactions on the Web, companies are going to want their systems to be a reliable transaction processing and secure business server and that's really exactly where IBM is headed. They are the best solution providers in this category. The other issue for large companies is that often their e-business has got to be tied to their real business. It's not a separate entity, so to the extent that IBM has a lot of databases and transaction processing software in the back office today, it makes sense that they will be able to integrate an e-business solution much more cleanly if they provide it.
Which companies will be laggards in the computer systems space?
There are a couple that spring to mind. Hewlett-Packard is a company that's seen its growth rate fall off dramatically as its printer business becomes relatively saturated and the growth in its PC business starts to level off. They are a company that has great technology but don't appear to be headed in the direction of some of the newer exciting growth areas like the Internet or networking and so I think they're going to have a tough road ahead. From a stock perspective, it's also a little tricky with some of the companies trading at all-time-high valuations. I sense that some of the companies in the PC sector, notably Dell, may have had a fantastic run last year but might have a more difficult time growing in an environment this year that might be more server-centric.
Dell is up and coming in the server space. Why would it be a laggard?
I think their server business will be one of the fastest-growing server businesses around. So you are correct there. What's going to be difficult for the company is to potentially offset a slowdown in growth in their desktop business by growth in their server business because their server business is just much smaller. Fundamentally, there are certainly no issues with the company and they are out-executing most other companies in the PC space. Their business model is going to go through a transition next year as more and more of their growth has to come from servers and storage. That's an area where we haven't seen the proof that they can effectively grow as fast as they have their desktop business.
What about PC demand for the upcoming year? Everywhere you read that PC demand is slowing down, then you see all the innovation in PCs and reasons why consumers would be motivated to buy more of them.
First of all, I'll give you the myopic view of what's going on today and perhaps next quarter. My sense there is that the demand is a little bit better than anyone expected. The primary drivers are the new price points that are opening up the market to consumers who never were able to afford a PC or consumers who want a second or third PC in their home. In Europe, consumers in general have not been buying PCs. So those are new markets where there may have been trepidation to buy earlier in the year when prices were falling so rapidly. Now that they have somewhat stabilized, it looks like consumers are coming in and buying PCs.
We are also hearing that that strength is going to likely exist going into the first quarter of this year so that the demand for the overall industry appears to be relatively healthy. Now, if you take it longer term, there are some issues in projecting PC growth. Probably the biggest unknown is what the Year 2000 problem is going to do to overall spending, especially in the second half of 1999. It's my personal belief that there will be enough activity in all sorts of segments and that we're not likely to see a fall-off. But there are some scenarios that suggest that perhaps corporations will turn off the spending for a little while, leading up until the Year 2000 to make sure all their systems are compliant and aren't going to have any hiccups -- unforeseen issues as we head into the new millennium.
Because of strong demand in the PC industry, the disk-drive space looks like it's coming out of its slump. Which names will continue to participate in the recovery?
What had happened in that industry over the last 12 to 18 months was that the supply-and-demand equation got very much out of balance. It is traditionally a cyclical industry and when times are good, all the vendors decide to build more capacity and suddenly there is too much out there and prices plummet and that's what sends the industry into a tailspin. We have just started to see signs that demand was actually starting to pick up and some of the supply had been shut off. Many of the vendors had closed factories and facilities, so pricing for disk drives was relatively stable and suddenly the industry looks like it's in a modest form of recovery. It's still too early to say that we're going to get back to significant growth, but so far, business looks very good.
As to who participates, you might notice that all the disk-drive stocks -- Western Digital (WDC), Quantum (QNTM) and Seagate Technology (SEG) -- are all up. But it's our belief that over the long term those that have the best fundamentals and are exposed to the high end of the disk-drive segment, which is where companies can differentiate their products, are the ones that are good plays. And that's why we are recommending Seagate with a target of $35.
In the storage space, you mentioned that you like both EMC and Network Appliance. What is your target price on the stocks?
Network Appliance is a smaller name and focused on some very high-performance technical issues. About 20% of their business comes from Internet service providers. Our target on Network Appliance is $52. EMC is the big, general-purpose competitor who is really the only independent supplier of large storage systems. Those are the systems that are integrating data in the Fortune 500 kinds of companies or pulling Internet data transactions and tying it into traditional company data-processing data. Our target on EMC is $100. Both companies will continue to grow very strongly over the next two years.
What might we find to be the biggest surprise in the computer systems and hardware space in the upcoming year?
I think the biggest surprise might be the sustainability of demand throughout an uncertain Y2K period and Europe's conversion to its new euro currency. Another surprise would be the lack of a slowdown in spending on the products of the enterprise-resource planning vendors, like SAP (SAP) and PeopleSoft (PSFT). Those stocks have slumped dramatically for the past six to nine months as investors have feared that large companies will slow their purchases of that sort of mission-critical software. But these products require constant upgrades and continued investment, and I think we're going to find buying above consensus expectations over the course of 1999.
Care to put a figure on the overall growth rate?
Overall growth in spending for information technology, which is one of the largest segments of the economy, is certainly going to be at least double the gross domestic product, or 9% to 10%. In the server space, I think growth will be 20%-plus. And in the PC space, I think we'll see unit growth in the 15% range and overall revenue growth in the mid-single digits.
moneycentral.msn.com
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