EMC Stock Analysis Post Q4 Earnings

  • EMC posts mixed Q4 earnings and weak 2015 guidance.
  • Currency headwinds will continue to affect the company in 2015.
  • Good growth in emerging storage technologies.

EMC (NYSE:EMC) has given mixed results in its Q4 earnings results which has caused some volatile price movements of EMC stock. The average analyst consensus was for revenue of $7.1 billion and EMC earnings of $0.68 per share in Q4 2014. EMC revenue rose by 6% YoY to $7 billion and a 15% rise in adjusted EPS to $0.69 per share. However, the future outlook shared by the management is very bleak giving a full year EPS of $1.98 whereas EMC stock analysis done by analysts suggested an EPS outlook of $2.16 for 2015.

Currency Headwinds Will Affect EMC Stock

Over half of the EMC revenue comes from abroad. Hence any currency movement affects the overall company figures to a great extent. As the Euro will see quantitative easing along with Yen, there are signs that the Dollar is set for another robust year against the major currencies. In the past 12 months itself Dollar has strengthened against Euro by over 21%. This is one of the main factors for the lower outlook shared by the company.

Apart from currency fluctuations the overall business has been growing in a stable and predictable manner. EMC’s core data storage business showed a modest sales growth of 2% whereas its other divisions like Pivotal showed sales growth of 18%. VMware delivered a growth of 16%. As the client’s requirement has moved from pure storage to higher analytic and management software EMC’s data storage business has been aided by other divisions in delivering these value added services.

VMware Spinoff On Hold

There had been a huge debate within the investor circle about the benefits of spinning off VMware (NYSE:VMW) in which EMC holds 80% stake valuing it at $26 billion at the start of 2015. Elliot Management which has around 2% of EMC stock has been pushing the management to take decisive action on this front. However EMC has reached a standstill agreement with Elliot Management till September 2015 after addition of its nominees to the board of directors. The current view in the management is that they would like to benefit directly from the growth of VMware. However this arrangement will need to come to a decisive decision, one way or another, as the current CEO Joe Tucci is set to retire this year. Before the new management takes command a long term view about VMware stake would need to be finalized. (See: VMWare stock analysis)

Growth In Emerging Storage Technologies

The entire storage ecosystem is also transitioning quite fast. The new emerging storage technologies within EMC’s fold are delivering good growth. In Q4 they delivered revenue of $800 million showing a 44% year on year growth. As more companies choose flash storage arrays, EMC will profit from XtremeIO’s performance.

emc stock growth
Fig: Good growth in the external controller based disk storage by EMC. Its market share rose from 25% in 2008 to 34.3% in 2013.

As the cloud offerings by other major companies mature there would be a need for consolidation within the storage market. There were rumors of a merger between EMC and HP throughout 2014. Even Oracle and Cisco were said to be looking to buy parts of EMC. However the deal valuation for any such deal would be a big hurdle as the EMC management believes that the firm would be a major IT player within five years and if there is any sale this fact should be reflected in the final deal.

EMC Business Segments Analysis

Pivotal Growth Story

A major business within EMC’s fold is Pivotal. Pivotal grew 18% this quarter YoY and 27% in the entire year over last year. General Electric (NYSE:GE) made an investment of $105 million in Pivotal in 2013 for a 10% stake. This investment heralds a much bigger plan by both EMC and GE where they wish to see greater cooperation in handling huge data produced by different products manufactured by GE. An ideal example is the jet engines made by GE. All the sensors produce enormous data which on a general flight can end up producing 15 gigabytes of data. This data needs to be analyzed and Pivotal’s PAAS offering should make an ideal choice for GE. Within the federated structure of EMC one can be sure that Pivotal will spring a few surprises and if given adequate investments even reach the heights scaled by VMware.

RSA's Modest Year

emc stock rsa revenue
Fig: EMC revenue growth from RSA products and services.

EMC acquired RSA in 2006 for $2.1 billion. Recently growth in this business has reduced considerably and it grew by a mere 5% in 2014 and 4% in Q4 Y0Y.

The management has tried to milk the cash cow component of EMC’s business to provide resources for these newer areas. Over time these new verticals should provide good cash flow and help in the transitioning of the firm.


EMC’s management has shown good leadership by increasing the market share in core areas and making good acquisitions. It should be able to navigate the changing waters of the storage business. EMC stock is currently trading at a low valuation when factoring in the VMware stake held by the firm. Along with the possibility of a merger or outright sale by EMC there is strong bullish possibility for EMC stock.

Rohit Chhatwal Rohit Chhatwal   on Amigobulls :

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