Stock Up on These Data Storage Companies

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

According to IDC, the global enterprise storage system market, after the economic recession, showed 18% growth in the year 2009-2010, realizing almost $31 billion in revenue. It is expected to grow at a CAGR of 3.9% for the period 2010-2015. Increase in the need for data management has created a huge demand for services and products.

Let’s see how these companies will manage to meet the increasing demand for data storage and services. 

Acquisitions will help generate revenue

EMC (NYSE: EMC) recently acquired a privately held company, Aveksa, to strengthen its security products division. This division provides risk and compliance management solutions and security to businesses. Aveksa provides identification verification services that help companies verify the identity of users accessing their web-based software application and networks.

This will help EMC combine its service offerings with Aveksa’s services in order to offer a single web-based cloud platform that will prevent unauthorized access. This acquisition will enhance EMC’s presence in the continuously growing identity management market and is expected to generate security division revenue of $271 million in the fourth quarter, up from $247 million in the previous quarter.

Additionally, EMC announced that it will acquire ScaleIO, a leader in developing server-side storage software. The will fall between $200 million to $300 million. This acquisition will strengthen EMC’s flash product division. Flash is a device that stores information, which the user can erase and reprogram electronically. The combination of services offered by both companies will provide customers with a better server-based Flash storage to utilize and manage.

This will also help EMC remain committed to its customers, enabling them to install flash software in their servers and storage infrastructures. Once these companies team up to provide a better storage software, the flash product division, that falls under EMC’s storage products, is expected to generate $3.1 billion in the fourth quarter, up from $2.5 billion in the previous quarter.

In order to strengthen its overall business, the company is looking for more such acquisitions. Therefore, the company is expected to generate EPS of $1.88 this year, up from $1.70 in the previous year. 

Ethernet growth in a competitive market

Brocade Communications' (NASDAQ: BRCD) Ethernet products gross margin witnessed 50% growth in the last quarter, compared to 40% in the previous year’s same quarter. High demand for Ethernet fabric products was the primary growth driver. The products are gaining traction since they are cost effective in nature and have the potential to meet end-user demand.

The company’s customer base increased to more than 1,150 from 950 in the previous quarter due to strong adoption among software as a service, or SaaS, providers and enterprise clouds. Brocade continues to develop new Ethernet products that will accelerate sales in the coming years. The total available market for Ethernet products is expected to grow from $6 billion to $14 billion over the next five years. With continuous growth, Brocade is expected to generate $146 million in this quarter and $167 million in the fourth quarter, up from$ 133 million in the second quarter.

However, Brocade’s core business of storage area networking, or SAN, products declined 7% year-over-year in the second quarter. The company generates more than 50% of its revenue from SAN products. It has invested enormous resources in the development of SAN products, but unfortunately, it did not gain meaningful market share due to heavy competition.

In 2012, the company outperformed with the launch of its 16Gbps Fiber Channel product. However, the company’s overall storage market growth is gradually declining due to its major competitor Cisco’s (NASDAQ: CSCO) recent launch of similar competitive products. Brocade’s revenue from SAN products is expected to decline to $286 million in the third quarter, and its EPS is expected to remain flat at $0.65 this year.

Cisco recently launched its first SAN product, a 16 Gbps Fiber Channel switch, the MDS 9710 multi-layer director, along with its MDS 9250i multi-service switch. This is three times faster compared to any rival’s storage product, delivering up to 24 terabits per second of switching capacity.

Despite being a top five global vendor, Brocade has 5% less market share compared to Cisco’s global market share of approximately 75% for its SAN and Ethernet products. With this launch, Cisco’s product business revenue is expected to increase from $9.29 billion in the first quarter to $9.43 billion this quarter and $9.55 billion in the third quarter.

Conclusion

All three companies are leading data storage manufacturers and service providers. They are likely to benefit from the increasing global demand for data storage services. With two acquisitions, EMC will remain committed to its customers, providing better storage software and strengthening its security division, which will help the company sustain in the long run and generate high revenue.

Cisco’s new product launch, along with other products performing well, will help the company generate high revenue in the coming years. Therefore, I recommend a buy for these two stocks.

Brocade’s Ethernet products are gaining traction in the market, and consequently, it will likely perform well in the coming years. On the other hand, its core business is under-performing due to heavy competition; the company is expecting flat revenue growth for fiscal year 2014. Therefore, I recommend a hold for this stock.

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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. 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!

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