Research firm FBR Capital recently downgraded the shares of EMC Corporation (EMC, Financial) from Outperform to Market Perform. The firm also slashed its price target for EMC from $31 to $28 citing EMC’s “weakening fundamentals, management's dogmatic view around VMware (VMW, Financial) and execution issues.”
I think the downgrade was unwarranted as EMC is trading at a relatively cheap valuation and plans to return billions in cash to shareholders via dividends and share repurchases. EMC operates in a high-margin industry, selling storage systems to enterprise-class clients across the globe.
EMC is three years into a data science and systems, and the company is redefining the future through its business approach, a sustainability-minded model built for today's ever-changing and resource-dependent world. The company's goal is to focus on the areas where it has the greatest potential to create positive change and to hold itself accountable by measuring and reporting progress, maintaining open and candid communication with internal and external stakeholders, and collaborating with peer companies. So, in my opinion, investors should ignore the downgrade and buy EMC.
Acquisition of Virtustream will drive growth
EMC’s acquisition of Virtustream represents a transformational element of EMC's strategy to help customers move all applications to cloud-based IT environments. With the addition of Virtustream, EMC completes the industry's most comprehensive hybrid cloud portfolio to support all applications, all workloads and all cloud models.
One of the world's fastest-rising cloud software and services companies, Virtustream is trusted by enterprises worldwide and its customers include peer enterprises such as The Coca-Cola Company (KO, Financial), Domino Sugar, Heinz, Hess Corporation (HES, Financial), Kawasaki (TSE:3045, Financial), Lexmark (LXK, Financial), Scotts Miracle-Gro (SMG, Financial) and a global trail of service provider partners who use Virtustream software to power their cloud offerings.
Virtustream brings managed cloud software and services capability to the EMC portfolio, which EMC also plans to combine into the Federation Enterprise Hybrid Cloud Solution. With the addition of Virtustream, EMC will allow customers to move their whole application portfolio into a cloud environment.
Deal ClusterHQ looks promising
Innovative enterprises that recognize containers are very effective for building and maintaining microservices, and EMC is committed to making it easier for the customers to leverage the power of containers within its modern IT architectures. By collaborating with ClusterHQ to make ScaleIO and XtremIO storage drivers available for Flocker, the company is supporting the merging of storage, cloud and open source platforms for the developer communities responsible for driving innovation in the enterprise. Joint EMC and ClusterHQ customer implements containers for increased per-server density and significantly decreased costs.
Swisscom (SCMWY, Financial), Switzerland's leading ICT provider, realized Flocker with EMC ScaleIO as part of a major new Platform-as-a-Service (PaaS) initiative. As a result, developers and operations (DevOps) teams can architect and manage high performance, reliable, scalable and cost-effective persistent storage backends for Docker-based applications.
Conclusion
Given that EMC operates in a high-margin market and plans to return $4 billion to shareholders, I think it would be wise for investors to continue holding the stock. The stock has even plunged 10% in 2015 so opportunistic investors can even open a long position. Given the aforesaid positives, I think investors should ignore FBR Capital’s recent downgrade as I think EMC will continue moving higher.
