3 Data Storage Companies You Shouldn't Miss
Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a world where more and more data is generated, storage needs will increase constantly, both in the personal and enterprise segments. As a result, companies dealing with data storage and handling seem poised to deliver strong growth rates in the upcoming years.
However, nowadays, several ways to stow information exist and some firms look more prepared for the future than others. EMC (NYSE: EMC), Seagate Technology (NASDAQ: STX), and Teradata (NYSE: TDC) are three companies in the data storage industry that offer interesting business models and deserve a closer look in order to check if they stand as worthy investments or not.
EMC provides storage, security solutions, and services for every level of a company's IT infrastructure. Operating in two categories, EMC Information Infrastructure and VMware Virtual Infrastructure, it leads the storage segment with roughly 30% of the market share, lagging huge competitors like IBM, Dell, and NetApp. By leveraging its existing assets, the firm is expected to gain greater share of the market in the long-term, delivering a projected growth of about 13.3% per year over the next five years to come. Meanwhile, it has developed a moat that helps retain clients due to high switching costs. This has provided not only a stable and predictable source of revenue, but also wide margins for the company.
One of the main factors that have influenced EMC´s success over the past few years was the VMware purchase in 2004. The acquisition helped increase information storage revenue by over 50% in five years and capture over 30% of the network storage market share. Looking forward, acquisitions, alongside internal developments, should continue to play an important role in the firm´s expansion. Backing this hypothesis is its free cash flow of over $5 billion and cash and equivalents, which are over $11 billion. Most recently, the company decided to actively manage this free cash by paying out 1.60% in the form of dividends and repurchasing substantial amount of shares.
In the years to come, cloud computing and Big Data initiatives are expected to drive revenue growth (Zacks) as EMC stands in an advantageous position to benefit from the expansion in demand to occur over the next several quarters. Several strategic alliances have and will most likely continue to contribute to expansion. Trading at only 20 times its earnings, a 46% discount to the industry average valuation, while offering compelling growth prospects, a strong balance sheet, a bulky cash mattress and now even paying out dividends, I’d recommend buying this stock.
Seagate: The primary hard-disk drive player
Seagate is a leading manufacturer of Hard Disk Drives (HDDs), holding over 40% of the market share. However, although HDD sales remain dominant in the storage space, the firm’s long-term success seems to rely on its capability to transition into the production of newer technologies, like Solid State Drives (SSDs) and other Flash-based memory products. In the short-term, analysts expect revenue to be driven by a shift to higher-margin enterprise drives that offsets a slower PC and Laptop market demand (Deutsche Bank).
Nevertheless, Seagate’s uncertain future and no EPS growth expected in the coming years counterbalance its cheap valuation, at only 6.8 times its earnings, making it a hold case, despite the growth opportunities provided by developing countries with price sensitive consumers which will most likely continue to choose the much cheaper HDD technologies over newer, and about 10 times more expensive, SSDs.
Meanwhile, declining HDD prices will continue to exert pressure over the firm’s margins, obliging it to maintain innovation and cut costs in order to keep earnings levels up. Consumer concentration is yet another concern for investors, as Hewlett-Packard and Dell accounted for about 30% of last year’s total revenue. Risks are high and so is the stock's volatility, expressed by a 2.99 beta.
So, in spite of consensus beating quarterly results, several analyst upgrades and a jump in its stock price, I will have to agree with Craig-Hallum’s Christian Schwab: at over $43 per share, I would wait for a better entry point if considering to invest in Seagate. Furthermore, aggressive insider sales dissuade me even further from buying this stock.
Setting aside the headwinds and long-term threats, the firm’s 3.53% projected dividend yield and strong margins, returns, and growth figures make this firm worth keeping an eye on, particularly as the second half of the year unfolds and shows the future of the PC and laptop demand.
Teradata is the world’s largest enterprise data warehousing provider, and its portfolio also includes enterprise analytic technologies and services. Although newer database and analytics technologies are arising, I would still recommend buying this stock as the company’s high-end products and high switching costs for its customers provide it with an economic moat to keep competitors at bay and help the firm retain clients – including Apple, Wal-Mart, and eBay, among many others -- going forward.
Meanwhile, its stock price has been experiencing pressure over the past few months, providing an attractive entry point for investors; trading at 24.6 times P/E, a 33% discount to the industry average, while offering great margins and returns, strong financials, an EPS growth projected at 13.6% per annum over the next five years, and a history of growth backing its prospects, this is a value stock you shouldn't miss on.
Moreover, as data volumes increase, Teradata should benefit from higher data analytics corporate budgets, mainly because big companies have increasingly “valued operational data as a strategic asset […] to drive supply chain efficiencies, manage inventory, enhance customer service, and shorten sales cycles.” (Morningstar) New strategic partnerships and strengthening relationships with large customers such as Microsoft, eBay, Oracle, IBM, AT&T, Best Buy, and P&G, to mention a few, should also provide plenty of upside for the longer-term. Furthermore, its strong balance sheet and cash position will serve for future acquisitions, a strategy that has proven highly profitable in the past.
Both EMC and Teradata are fairly moated companies that offer not only compelling stability, but also attractive and sustainable growth expectations. Trading below average valuations while having a bright future ahead of them, these are two investment opportunities that look too attractive to pass on. Seagate´s case is a little different: dominating in a soon to decline industry, its short and medium-term outlooks seem promising, but its longer-term viability and profitability seem quite questionable.
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Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Teradata. The Motley Fool owns shares of EMC. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!