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No. of Recommendations: 17
Posted this on the EMC board today...waiting for the linch mob.

--fox

I guess I should be glad I just sold all my Network Appliance at 113 so the gains could be used to offset half my capital loss from Legato Systems. I was just thinking that although Ntap is the market leader in NAS, unchallenged by other small rivals, the leaders in tech would probably start giving Ntap some serious competition. And so I find out EMC has nearly doubled its NAS market share in the last year. Ntap investors ought to be worried about Ntap having the time to grow into its lofty valuation.

Lofty valuation. I'd be careful. Let's review a few facts, which I believe I can do objectively since I own both stocks.

NTAP has been growing at 90%, which, given their large base in the NAS market, if far more impressive than EMC's doubling off a significantly lower base in NAS. Generally, market leaders with dominant market shares, like EMC has in the SAN market, have some difficulty growing at rates of much smaller competitors. In this segment of the market, EMC is the smaller competitor, so in order to catch up, they are going to have to do much better than simply matching the growth rate NTAP is delivering!

NTAP lofty valuation? NTAP should earn close to .80 next year, which gives you a P/E of 125, which is 138% of its growth rate. EMC should earn $1.40 next year, which at today's price gives you a P/E of 75, which is 300% the 25% growth rate in revenues it achieved last quarter. Even if they return to growth rates in the 35% range, their multiple is more than 200% its growth rate. Can't look at P/Es in the absolute.

EMC is far behind in NAS at a time when we are witnessing a paradigm shift toward NAS. NAS is far cheaper than SAN and it will take a substantial portion of the storage market. Even EMC recognize this, which is why they are paying so much attention now, though a year ago they were dismissing NAS. Their solution is inferior and they know it and are trying to change it. But NTAP is a superbly run company. It will be a difficult battle, and one that owners of EMC should recognize as significantly threatening to EMC.

This is not to say that EMC is a bad company. They will continue to dominate the SAN market. But SAN will lose share to NAS and unless EMC can rebound from a very late start in NAS, their growth rate will be threatened. In my opinion, EMC committed a classic incumbent mistake; instead of embracing the paradigm shift, they dismissed it in an attempt to keep the storage market from migrating to a storage solution in which their share was not dominant. This gave NTAP a clear racetrack, and they are many laps ahead.

I wouldn't sell my NTAP; I think it's cheap.

--fox
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