EMC (NYSE:EMC) is the global leader in the enterprise storage system market as well as the storage software market. Our price estimate of $52.22 for EMC is about double the current market price due to its leadership position in storage software, its 80% ownership of virtualization leader VMware and the growing storage and virtualization market which is being driven by cloud computing.
We believe enterprises moving to the cloud present a huge growth opportunity for EMC as demand for storage hardware, software and virtualization will increase. The need for hybrid and flash arrays driven by big data analytics will drive sales of high end flash storage and the bring-your-own-device (BYOD) revolution will fuel the growth of virtualization.
We examine some of the top drivers of EMC’s growth and how they factor into our analysis for the company.
1. EMC’s Share in the Global Storage Market
Information storage, which consists of storage hardware, software and services is one of EMC’s largest divisions and accounts for nearly 43% of our price estimate for the firm. As shown in the chart below, EMC’s share in the global software market has increased significantly over the past few years, and we expect this growth to continue for the next few years as the firm maintains its lead in the worldwide disk storage systems market and continues to expand its storage software offerings.
EMC is currently the leader in the global storage software market with a share of ~30% as of September 2012, according to research firm IDC. 
With most of the storage software now being bundled on with the hardware, we expect EMC’s storage software market share will at least match the company’s leading share in the global disk storage systems market, which according to IDC stood at 29% as June 2012. 
2. Big Data and Cloud Adoption Will Bring New Opportunities
IDC cloud research shows that revenue from IT cloud services is expected to reach $72.9 billion in 2015, growing at a compound annual growth rate (CAGR) of 27.6%. This is over four times the growth expected for the worldwide IT market which is an estimated 6.7% and presents a huge growth opportunity for EMC and VMW which are in the business of enabling the transition to the cloud. This market is even bigger if you consider the potential of mobile phone based virtualization which is being spearheaded by VMware. 
3. VMware’s Value Not Fully Reflected
We estimate that VMware is the second most valuable business division for EMC, after information storage, making up nearly 35% of the firm’s value. Below we discuss the outlook for VMware’s virtualization software offerings and the firm’s share in the global virtualization software market.
VMware offers virtualization software that can be categorized into two primary segments:
a. Desktop Virtualization Software
Desktop virtualization software allows users to run multiple operating systems on a single desktop or notebook. For example, by using VMware’s desktop virtualization software, a user can run Apple’s Mac OS X from within a Microsoft Windows machine.
b. Server Virtualization Software
Server virtualization software allows companies to increase the utilization of their servers by allocating the virtualized resources of server hardware to multiple applications, in a manner that is independent of the underlying operating system required to execute the application.
VMware Is The Virtualization Leader
Though VMware’s share in the virtualization software market has decreased from 50% in 2005 to 45% in 2012, it is still the market leader and commands a premium price for the features it has to offer such as live migration, which allows the programs to be functional while migrating between data centers.
The firm has lost share to competitors like Microsoft, Citrix and Oracle as the companies have aggressively targeted the virtualization software market. We project that VMware’s virtualization software market share will continue to decline in the future, reaching 39% by the end of our forecast period, driven by increasing competition and aggressive pricing as the tech giants try to gain market share.
We estimate that virtualization revenue will be ~$4.2 billion in 2012 and VMware has gross margins of about 84%. This is expected to grow to $9.2 billion by the end of our forecast period with margins remaining the same. We believe that VMware’s value has not been fully reflected in EMC’s market valuation, and this is a major contributor to the potential upside in our estimate.
- Top dog EMC crushes whimpering rivals in storage pack, www.theregister.co.uk, Sept 10, 2012 [↩]
- Worldwide Disk Storage Systems Markets Post Strong Results in First Quarter of 2012, www.idc.com, June 8, 2012 [↩]
- IDC Cloud Research, www.idc.com [↩]