EMC reported results that were slightly below Wall Street expectations and management’s prior guidance. In addition, management lowered full year guidance. Interestingly, the stock is down barely over 1% today, a good performance given the huge drops at other tech companies after reporting earnings. Many stocks that have yet to report dropped a lot more than EMC in anticipation of poor reports and weak guidance.
I think EMC is taking the quarter reasonably well because it is quite clear that the primary problem the company is facing is a weak IT spending environment at major enterprises. EMC’s results and guidance indicate that it is growing faster than other major IT suppliers as its focus on big data, cloud computing, flash solutions, and virtualization provides insulation against weak spending in more mature, legacy technologies. Storage and virtualization are gaining share and sit in the sweet spot of the major trends in enterprise computing.
Given EMC’s excellent positioning in growth markets and a strong product cycle across most its storage solutions, I think it will pay to ride out the near-term weakness in stock. Should spending patterns actually improve or Wall Street begin to anticipate better IT spending, EMC shares are likely to reassert their leadership role we saw earlier in 2012.
Catching the timing of these sort of changes is difficult. In the meantime, EMC’s strong execution and attractive end markets should prove defensive if the market or technology environment worsens. On the other hand, a lesson learned here is not to be greedy when the stock rallies again as even the best positioned companies face cyclical risks in the highly competitive and mature enterprise technology market. I am highly confident Northlake will get a chance to sell EMC at 2012 highs around $30, good for a 25% gain against today’s prices.
EMC is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake regulatory filings can be found at www.sec.gov.