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EMC Cashes In On Growing IT Storage Needs


With an 18% annualized growth rate and revenues doubling since 2002 the core of EMC is firing on all cylinders.

"You can hide 'neath your covers and study your pain
Make crosses from your lovers throw roses in the rain
Waste your time praying in vain for a savior to rise from these streets"
Thunder Road (Bruce Springsteen)

Thunder Road is on side one, the first song of Born To Run, released on August 25, 1975. As close to a perfect album as humanly possible - and yes, I know I have said similar about some of Zep's work.

But for those that have yet to buy this may I suggest running out at some point this weekend to purchase the Born To Run 30th Anniversary Edition box set that was released two years ago next week? It's a great illustration of following your dream and letting nothing stand in the way.

As far as trading goes, a lot of folks today want to hide beneath their covers and study their pain. Personally, I think this is a much needed washout for the market.

Equities are very quickly being repriced and, although painful, this too shall pass. In my opinion, we broke down technically when we closed below 1490 in the S&P, a level that Jeff Macke and Toddo have been so artfully trading around and speaking about for quite some time. That being said, the Dow seems destined now to re-test the 12,800 level we saw over the summer.

But although I am not sure in what form the savior will be when it does rise from the streets, I do think that opportunities are presenting themselves at current market levels. EMC Corporation (EMC) has been an incredible story for quite some time. Starting off the year trading around $13.00, the stock had nearly doubled when it topped out at $25.47 right around Halloween. Over the last two weeks however, we have seen the stock correct a tad over 20%.

The overall market has obviously been a factor, but a Goldman Sachs downgrade to neutral from buy on November 5th didn't help either.

But there are a lot of good things happening at EMC Corp. With an 18% annualized growth rate and revenues doubling since 2002 the core business of EMC is firing on all cylinders. On top of that margins have been improving as operating expenses have been on the decline due to improvements made on the efficiency front. EMC is in the midst of a $2 bln stock repurchase plan coming on the heels of the $3 bln worth of stock it bought back last year.

EMC is also looking to cash in on the growing market in China. To that end, EMC will be spending $1 bln through 2012 to increase research and development and establish new offices in the country. The cherry on top of this sundae, however, is clearly its stake in VMWare (VMW), the virtualization software company it acquired in 2004. VMware's software allows a single computer to effectively do the work of many machines. This means companies can spend less on equipment, while using less energy and physically taking up less office space. For those not familiar with VMWare's performance this year, a quick refresher: After the 33 mln share IPO was priced at $29 through Lehman Brothers (LEH), Citi (C) and J.P. Morgan (JPM) on the evening of August 13, VMW opened the next day at $52 and has never looked back - topping out at $125.25 again around Halloween.

For a trade, I think that EMC looks very attractive. The 20% correction over the last two weeks coupled with the huge volume day we saw in the stock yesterday indicates to me some capitulation. To amplify, EMC traded 108 mln shares yesterday with normal volume being closer to 42 mln shares. The knock on EMC may be on valuation, but when the growth of VMWare is factored in, EMC is not as expensive as it may appear on first glance. A slowdown in the United States is always a concern, but now more than 40% of EMC's revenues come from overseas, with that revenue mix seemingly headed in the right direction.

The storage story is very much real as the digital revolution continues to grow and be global in scope. The overall tape will remain scary for a spell, but EMC may be one of the saviors to rise from these streets.
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No positions in stocks mentioned.

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