This article is part of our Rising Star Portfolios series.
Let there be no doubt: I'm a shameless EMC (NYSE: EMC ) bull. I've pounded the table over and over telling investors their shares are a steal. There's simply no better way to get cheap exposure to the trend around massive data growth and complexity. So, maybe it's my rose-tinted glasses talking, but when I saw Hewlett-Packard (NYSE: HPQ ) was shelling out a whopping $10 billion for big data specialist Autonomy, I thought one thing:
Good for EMC.
It's not what you think
And my bullishness on EMC following HP's acquisition isn't for the reasons you might expect. The obvious implication is that Autonomy's specialty is making sense of huge amounts of data. Likewise, as the storage leader, EMC profits through the need to store all this data being created.
However, what's less understood is the niche Autonomy fills in the data world. Judging by the fact that Autonomy's website crashed shortly after news broke that HP was close to buying the company, I'd guess a fair amount of traders were furiously Googling what the heck Autonomy actually does.
Here's the key idea: while Autonomy might describe itself behind the hard-to-decipher description as "the leader in meaning based computing & enterprise search," it's largely a play on the growth of unstructured data. As Autonomy says in the company's "Introduction to Autonomy" section:
Previously computers could only process information if it was organised in rows and columns, or "structured"
The amount of unstructured information such as email, instant messaging and video is growing exponentially so that it now exceeds structured data 4:1
This is the biggest change in the IT industry to date because it is the first major change to the information rather than the technology
A buyout you should be watching ...
Likewise, EMC recently made a big push into the growing field of unstructured data. While Autonomy allows analysis of the data, EMC acquired a special architecture that's ideally suited to storing the data being created when it purchased Isilon last year. Here's what I had to say about the deal in an earlier article on the subject:
EMC has been extremely adept at filling product holes with timely acquisitions. Last fall, I was able to visit scale-out storage specialist Isilon's headquarters and talk to the company about its ambitions in the storage market. I came away very impressed; their solution for storing "unstructured data" made complete sense, especially with more and more data moving toward unstructured forms like videos or power point presentations. However, I was unsure of their ability to sell their product to stodgy IT firms that might be unfamiliar with a new, seemingly revolutionary kind of storage. However, EMC eventually bought Isilon. While the deal might have struck some as overpaying, I see Isilon as a key storage centerpiece that can create outsized opportunities for EMC as the storage industry continues morphing. Whereas Hewlett-Packard and Dell(Nasdaq: DELL ) had to engage in a wild bidding war over 3Par in large part because they had underinvested in storage research and development, EMC is filling logical holes in its portfolio that should leave the company primed to continue growing strongly across the next half-decade. EMC can immediately put its world-class sales force to work selling Isilon products, and the deal should only expand the company's leadership in storage.
At the time, many believed that EMC had overpaid for Isilon. Seeing as how Isilon only had $175 million in trailing revenues, the 13 times sales multiple looked extremely rich. However, we've now seen HP pay 11 times sales for a company in the same field. Further, I'd argue that EMC can give its acquisition a much stronger distribution, meaning that there's more upside to Isilon being bought by a large company relative to Autonomy. In an odd way, HP's willingness to pay up so steeply for Autonomy validates EMC's decision to shell out a high price for Isilon last year.
Bottom line
Investors have started cautiously looking back to the broader storage sector, with heavily beaten down Micron (Nasdaq: MU ) and SanDisk (Nasdaq: SNDK ) seeing recent gains after a brutal beginning to August. Companies peddling more commoditized storage like flash memory modules naturally bear the brunt when fears of a steep demand decline in the semiconductor industry rear their ugly head.
Investors also fled high-end storage after NetApp's (Nasdaq: NTAP ) tepid quarter, but I think that's a mistake. While IT spending could drop in the short-run, advanced data storage is an absolutely critical expenditure for most large IT organizations. EMC's acquisition of Isilon is just another example of the complex problems that top-tier storage companies like NetApp and EMC are tackling.
So even if IT budgets get cut for months -- or even years -- in the long run, these are two advanced companies that offer a breadth of solutions that are not only unparalleled by their rivals, but are essential in modern business. I might sound like a broken record, but my suggestion is to get in on the cheap while you can.
To follow my technology commentary and buys in my real money portfolio, make sure to follow me on Twitter. Otherwise, the best way to keep up with all EMC analysis is adding the company to our free My Watchlist feature that gives you up-to-date news on all your favorite companies.
