Data Companies Exposed To Enterprise Rather Than Retail Customers To Show Higher Rates Of Success According To Senior VP At Wedbush Securities
May 9, 2011 - The Wall Street Transcript has just published Data Hosting Centers & Data Storage Report offering a timely review of the Data Storage sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Kaushik Roy is a Senior Vice President, Equity Research at Wedbush Securities, where he covers data center technologies. Prior to that, he was a buy-side Analyst at the Neuberger Berman Technology Fund. Before joining Neuberger Berman/Lehman Brothers, Mr. Roy was the Senior Enterprise Hardware Technology Analyst with Susquehanna Financial Group for three years. Mr. Roy also followed the enterprise hardware sector with Robertson Stephens earlier in his career. Prior to working on Wall Street, he was with EMC Corporation as a Strategic Investment Manager and with John Deere Healthcare as a Systems Engineer. Mr. Roy received an MBA from Cornell University, an M.S. in electrical and computer engineering from Louisiana State University, and a B.S. in electrical engineering from the B.I.T. India.
TWST: The last time you spoke to us, in October 2010, you said data center companies that were most exposed to enterprise customers rather than retail customers were in a better position. Has that trend continued into 2011 and to what extent, if at all, is the retail segment picking up?
Mr. Roy: Yes, that trend continues. If you look at the consumer segment, there are two parts of the consumer segment; one is developed countries and the developing countries. It seems like the consumer segment in developing countries, they are doing not so bad, but in the developed countries - the U.S., North America and Western Europe - if you look at their unemployment rate, if you look at their GDP growth, they're still struggling. So there is still weakness in the consumer segment in the Western countries and that has been the drag for companies which are exposed to the consumer segment. On the other hand, if you look at the stocks or companies that are predominantly serving the enterprise market or the commercial market, they are doing relatively better. For instance, if you look at VMware (VMW), or if you look at EMC (EMC), they are doing well because all their products are exposed to the businesses. So yes, that trend still continues.
TWST: What's your best estimate of how much corporate spending on data storage may increase in 2011? And which of your companies is best positioned to capture any growth that we will see?
Mr. Roy: It depends on what the macroeconomic situation could be in the second half of this year, which is somewhat unpredictable at this point, but I would say that data storage market will grow anywhere between 6% to 8% this year, in 2011. And we're not talking about low-end storage, we're talking about mid- to high-end enterprise storage - 6% to 8% is very reasonable, and the companies which will do well are EMC and NetApp (NTAP), and they will grow faster than the market. They will grow revenues better than 8% because they'll gain share. They have been gaining share, and I believe they'll continue to gain share. The other companies which also participate in this enterprise storage market are IBM (IBM) and HP. They are big enterprise storage providers, and Sun-Oracle (ORCL) and Hitachi Data Systems. It seems like Dell is becoming more and more interested in the data storage or enterprise storage segment. So now you have six vendors who are participating in this market.
So this segment of the overall IT market will do better than the other segments such as PCs or even servers. For PCs, you can postpone your PC upgrade. Even for servers and most software applications, you can postpone those upgrades by six months or one year, if you have to. But storage is such a thing that if you're running out of capacity, you have to go buy, add more capacity. And this is for enterprise storage, you cannot just buy hard disk drives and put it together and make it work. These are highly sophisticated machines that not only have good performance, but they have to be protected and managed in certain ways. And then it has to be compliant with the regulatory requirements. It also has to support the business continuity requirements. That means the data has to be replicated to another site and things like that. So EMCs, NetApps and companies that participate in that segment are the ones who will continue to benefit in 2011.
TWST: If you have to pick one to put your money in for the mid- to long-term right now, what would it be and why?
Mr. Roy: I will give you two names for different investment styles. If you are looking at large cap, slightly longer horizon, EMC is a very good stock to own. If you look at its performance last year, it has outperformed most of its peers in tech, and I believe it will continue to outperform its peers in tech this year. This is partly because they are in a market that's very strong and robust, they are executing very well, they have the best-of-breed products in storage systems, they have good partnerships with large vendors such as Cisco, and they own 80% of the marquee named VMware, which is the biggest beneficiary in the shift to cloud computing. So on a risk-adjusted basis, EMC is still a very good stock to own. On the smaller names, I would say Brocade is a turnaround story. There is still some skepticism. There are four reasons why we like the Brocade stock. Number one, they have a new-product cycle this year; number two, the hundreds of people they have hired in Ethernet sales are starting to become productive; number three, the Ethernet margins are going to get better with the new products, significantly better; and number four, the bar appears to be low. So in the smaller names, I like Brocade.
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