EMC is known primarily for selling billions of Gigabytes of storage hardware to large and medium sized businesses worldwide. The explosion of digital information is creating accelerating demand for storage hardware. We estimate that worldwide storage demand will increase from 11 billion Gigabytes in 2009 to nearly 85 billion Gigabytes by the end of the Trefis forecast period.
Despite the great potential for selling more storage hardware, we estimate that only 8% of EMC’s stock price is attributable purely to its hardware business. Nearly 70% of EMC’s stock price comes from the storage software and virtualization software that EMC sells. Both the hardware and the software businesses rely on the underlying exponential demand growth for data storage, yet their value contributions are starkly different. The reason why is in the profit margins.
We estimate EMC’s Storage Software Gross Margin to be around 80% compared to less than 40% for its Storage Hardware Gross Margin. Within EMC’s content you can explore how Storage Software Gross Margins and Storage Hardware Gross Margins impact the $19.57 Trefis price estimate.
