Why You Should Buy This Undervalued Tech Stock Now
Yaniv is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
EMC Corp. (NYSE: EMC) is a leader in cloud computing solutions. It provides enterprise storage systems, software and networks services to leading corporations. The stock appears undervalued and it could be poised to move higher in the upcoming months.
EMC owns a significant stake in the cloud software company, VMware (NYSE: VMW). EMC and VMware recently agreed to create a new company called "Pivotal". The new company will provide data analysis.
At current levels, there is a significant gap between company's fundamentals and stock valuation. EMC's decision to spin off VMware has proved to be successful. However, the continued growth of VMware and the rise in share price, has led to devaluation of EMC's standalone business, especially when compared to that of NetApp (NASDAQ: NTAP), its most important competitor.
Despite rumors from former employees about management's misconduct, the company sales are estimated to jump from about $300 million to about $1 billion by 2017. EMC and VMware are poised for long-term success. The markets in which EMC and VMware operates are expanding at a high pace. EMC's solid financial fundamentals allow the company to heavily invest in R&D, acquire competitors and develop new ventures. Pivotal's business is set to grow at a rapid pace through the next coming years. In addition, if Pivotal realize its potential and will eventually go IPO, the venture will likely lead to significant gains for EMC investors.
Analysts still like the company
Analysts are bullish and see significant upside potential for the stock. According to Yahoo finance, out of 34 analysts covered EMC, 12 analysts initiated a strong buy recommendation. As a result, EMC's mean target price is currently $29.51. In addition, Brookside Capital Hedge Fund (also known as the legendary Bain Capital) recently indicated EMC is one of its favorite stocks. It appears there is a consensus that EMC is a now a bargain. A move towards the $30-$31 level will provide investors gains in the ballpark of 30%. Since the stock has repeatedly bottomed out around $22, the downside is somewhat limited at current levels, while the upside appears to be quite appealing.
Historic rivals, new competition
Traditionally, EMC's faced competition from two major rivals: International Business Machines Corp, IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ). IBM has been underperforming and delivered flat returns to investors. Recently, IBM has been reportedly in a race against EMC to purchase SoftLayer, a cloud provider based out of Dallas, Texas. The deal could be worth as much as $2 billion. Cloud providers are becoming popular target for takeovers, which makes the race between the two rivals more interesting than before. It is important to note that EMC has a good "track record" for successful takeovers. In 2003, EMC purchased VMware for only $660 million and it is now valued at $30 billion.
Hewlett-Packard has been delivering decent results and stock has been up 40% over the course of the year. However, since EMC priced at a discount comparing to HP puts the company in a position to play "catch up" on valuation gap.
Beside competition from IBM, HP and Dell, EMC's most significant competitor is NetApp. EMC is in a better position that NetApp since its revenues are comprised of a wide range of products. Moreover, EMC has more than three times NetApp’s revenue. NetApp’s revenue derived from a single segment, enterprise data storage systems, with storage arrays contributing nearly 70%. On the other hand, NetApp's revenue growth is mostly organic and its balance sheet is strong. NetApp is poised for continued growth. Having said that, I anticipate the tough matchup to continue in the years ahead.
The Foolish bottom line
At current state, EMC is fairly cheap comparing to peers such as NetApp, VMware and HP. I can only assume the "arbitrage gap" is about to disappear in matter of months. I strongly believe EMC's good old days are not over yet. At a price around $22 per share, there is a better probability for upside rather than downside. The Pivotal venture and its IPO potential offer EMC investors an additional channel to profit. Furthermore, EMC's expertise and experience in successful takeovers will sure turn beneficial down the road. I truly believe that EMC is a good buying opportunity now, and will sure deliver better results than peer at least in the foreseeable future.
Yaniv Hirsch has no position in any stocks mentioned. The Motley Fool recommends VMware. The Motley Fool owns shares of EMC, International Business Machines., and VMware. 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!