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Investment Overview for EMC (NYSE:EMC)
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Below are key drivers of EMC's value that present opportunities for upside or downside to the current Trefis price estimate for EMC:
Storage Software
- EMC's Share in the Storage Software Market: We currently forecast EMC's market share of the storage software to increase from about 25% in 2012 to 26.5% by the end of the Trefis forecast period. However, there could be 2% downside to the Trefis price estimate if EMC's market share were to remain constant at its current levels going forward.
Storage Hardware
- Storage Hardware Gross Margin: We currently forecast Storage Hardware gross margin to reduce from its 2012 levels of ~42% to ~32% by the end of our forecast period. This is mainly due to intense competition in the storage hardware segment leading to margin pressures. However, if the gross margin increased back to its 2008 level of 45%, there could be an upside of 4% to the Trefis price estimate for EMC's stock.
For additional details, select a driver above or select a division from the interactive Trefis split for EMC at the top of the page.
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EMC makes money by selling storage hardware, software and services primarily to medium and large size businesses. EMC's storage hardware helps customers manage data more efficiently and keep the information available and secure. The disks are used for large, data-intensive applications like e-mail, inventory, supply chain, backups and regulatory and compliance information.
EMC's storage software enables customers to use all features and functions related to data storage. Software ships along with the hardware system but is priced separately.
Desktop and server virtualization software is a growth area for EMC. EMC owns 80% of VMware, which is the leading provider of virtualization software used to run software applications. Virualization allows software to be run independent of the operating system on the PC or server hardware executing the application by "virtualizing" the underlying hardware resources. Virtualization allows multiple "virtual" machines to be run on a single physical machine, sharing the resources of that single computer across multiple environments. Further, these different virtual machines can run different operating systems such as Microsoft Windows, Linux or Mac OS, and multiple applications on the same physical computer
Despite being commonly thought of as a "hardware" company more than 70% of EMC's value comes from the software and services it sells to manage and optimize server hardware.
Hardware vs. Software & Services
Although the sale of storage hardware generates the most revenue for EMC, the higher profitability of storage software and services is responsible for much of the stock's overall value. All three segments benefit from the forecasted exponential growth in electronic information over the next few years.
Profit Margins
We forecast that the storage hardware segment will have a gross margin of ~41% in 2013, slightly low from 2012. Gross margin will continue to decrease steadily to ~32% by the end of the forecast period, due to the significant pricing pressure that storage hardware has experienced in recent years. In comparison, the software segment is expected to have gross margins of ~79% over the same time period.
Storage Hardware & Software Markets
The storage hardware market in terms of Gigabytes (GB) of storage is expected to grow from over 27 billion GB in 2012 to nearly ~280 billion GB by 2019. However, the value of the storage hardware market is expected to grow more modestly due declines in pricing per GB of storage. The storage software market is expected to grow at around ~5% annually from ~$14 billion in 2012 to ~$19.5 billion by 2019.
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Ongoing Server Virtualization
At a very fundamental level, virtualization increases utilization of hardware resources, decreases cost and increases ease of managing multiple applications. VMware's server virtualization technology decouples the software from the underlying hardware, and enables aggregation of multiple servers, storage infrastructure and networks into pools of resources that can be delivered dynamically, securely and reliably to applications as needed.
Continued Exponential Growth in Digital Information
We believe that all digital information created and replicated each year is growing at an average annual rate of nearly 60%. The number of total global Internet users has risen ~5x from 360 million users in year 2000 to ~3 billion Internet users by 2012, implying an annual growth rate of 18.4%. The storage demand generated by the rising Internet usage is expected to remain high over the forecast period.
Trefis Forecast Rationale for EMC Market Share of Storage Gigabytes
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${forecast} refers to EMC's market share of Total Storage Capacity sold (in Gigabytes) globally.
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${forecast} has increased from ~18% to ~32% from 2005 to 2012. We believe EMC will continue to gain market share steadily to reach ~33% market share by the end of our forecast period.
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Trefis considered the following five factors for its forecast:
- EMC's market leadership position in large and high-end storage
- We believe EMC's market leadership with large enterprises gives it market share stability. Preserving data is a critical compliance and competitive requirement for large enterprises and hence we believe large enterprises are less likely to move around vendors given the fact they have ongoing maintenance and service contracts for both hardware and software for their storage devices from EMC
- EMC is the largest pure play storage company in the world and its market leadership position enables it to devote R&D resources to constantly be at the leading edge of technical innovation
- In early 2008, EMC became the first enterprise storage vendor to integrate next generation Solid State Drives (SSDs) into its information storage portfolio as part of its Symmetrix DMX-4 system
- SSDs utilize flash memory to store and retrieve data, yielding response times that are dramatically faster than the fastest hard drives
- In addition, because there are no mechanical components in flash drives, they require less power to operate
- EMC's vastly improved product range
- EMC is the only company which has the breadth of products and services to target all types of customers; from large enterprises to small and medium businesses
- EMC has made major strides in this area from 8-10 years ago when it largely relied on the old “Symmetrix 5” system that was overpriced compared to the average market price levels
- EMC's efforts with SMB customers: We expect EMC to gain market share in the SMB space as it comprises an important growth segment
- Over the last 5 years, EMC's share of mid-tier customers increased from 14% to 33% since introducing the CLARiiON CX platform (EMC grew at 2x the market rate)
- EMC's recently introduced CX4 series is the only mid-tier array with flash drives which enables it to offer 10x faster response time and 38% less energy consumption per TB when compared to non-flash platforms
- We believe that networked storage penetration in the SMB segment is far below that in enterprise customers. In addition, it is estimated that only ~50% of SMBs employ external disk arrays, compared to 70% for large enterprises. As a result, networked storage growth in the SMB space could exceed that of the broader market in coming years, and server virtualization adoption could be a critical catalyst
- EMC has made special efforts in strengthening its product offering targeted at the SMB segment. EMC has introduced low end versions of the CLARiiON and also introduced SMB versions of its legacy software products, such as RepliStor, VisualSRM and others
- World class direct sales force
- EMC is known for having a world class direct sales force. We believe this has been a major enabler in EMC's deep relationships with customers. As EMC is embarking upon a major cost cutting initiative, its direct sales force is one area it is not going to make any headcount reduction. We believe that EMC's strong direct sales force will continue to be a major factor in helping it gain share in the market
- Improved EMC sales and pricing approach
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EMC has improved its sales force effectiveness that will help it grow market share. For example, as competitive pressures have mounted, EMC's sales people are more willing to revisit pricing proposals and cut down on prices, which is something they were previously unwilling to do
Back to Company OverviewHow Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on:
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