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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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No. of Recommendations: 0
Very fair evaluation - not your fault if the facts favor NTAP. ;-)

I doubt you'll be hearing any lynch mob approaching.

Thanks for sharing! Cheers, Charles
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No. of Recommendations: 6
An interesting response from EMC board:

This thread addresses an issue that bears watching.

Warning long EMC and NTAP at a ratio of 3 to 1.

NAS and SAN appear at this stage in storage development to be:
1. Growing at strong rates year to year.
2. Both support enterprise and internet storage needs albeit each with a different twist.
3. They appear at this stage to be mutually exclusive and derive strength from the existence of the other.

My concern that IMO bears close watching is this:
SAN by definition can not do what NAS does!
However,
NAS (in the future as its capabilities are more fully understood) may be able to do many of the things SAN does for less $$$.

If NAS becomes preeminent, I hope to be able to spot the trend early enough to reposition 3 NTAP for every 1 EMC.

BWDFDIK

regards, WillintheWoods




And my response to the response:

NAS (in the future as its capabilities are more fully understood) may be able to do many of the things SAN does for less $$$.

There it is. SAN is a product of limited bandwidth within the local area network itself. 10-gig ethernet changes all that. You no longer need a complicated and expensive additional network to handle storage. You put the storage right into the LAN, the cost of which you are going to incur anyway, because there is plenty of bandwidth for the LAN to handle all network activities, including storage. The marginal cost of storage becomes a relatively inexpensive NAS appliance. To me, this is an unstoppable shift.

If NAS becomes preeminent, I hope to be able to spot the trend early enough to reposition 3 NTAP for every 1 EMC.

The time to spot the trend is just about now. SAN will grow significantly over the next couple of years given the huge need for storage overall. But once NAS becomes more universally accepted, you are likely to see a relatively sudden contraction of the SAN business. The suddenness of it will make it difficult to do the switch if you wait for NAS to become pre-eminent.

--fox





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No. of Recommendations: 0
Interesting...

FWIW, NTAP appears on the Workshop Model's Relative Strength screen, a high-risk screen strategy, while EMC appears on the Spark screen, a moderate-risk strategy. (RS compensates for its higher risk with higher returns; see the links.)

Thanks for the analysis -- seems like it indirectly addresses the different risk levels of these two stocks. Feel free to comment more about this.

Workshop Rankings:
http://www.fool.com/Workshop/WorkshopRankings.htm

Workshop FAQ:
http://boards.fool.com/Message.asp?id=1030063000770000


Washu! ^O^

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No. of Recommendations: 5
Someone posted on an SI board that EMC's recently-released NAS revenues include the Symmetrix boxes that are attached to the Celerra file servers that they are selling. If true, this means that the latest NAS market share figures (EMC at 18% share of the NAS market, up from 8% last year; NTAP at 46%, up from 41% last year) may not constitute a pure "apples to apples" comparison.

The reason is that EMC's primary market is in its Symmetrix storage systems. Usually, these connect to general purpose servers such as Sun servers. However, EMC does offer a dedicated file server called Celerra. Celerra works only in conjunction with its Symmetrix systems. Formerly, Celerra did not account for a large component of EMC's sales, nor did EMC particularly push sales of the Celerra product. That approach now appears to be changing. At present, Celerra is EMC's only NAS product.

It's very easy to visualize a scenario in which EMC decides that it wants to be the "King of NAS" or the "fastest growing NAS company," and offers its existing Symmetrix customers very favorable incentives on Celerras in tandem with the Symmetrix boxes that they are already purchasing. Result: sales of Celerra increase, as does the NAS market share (especially if measured in terms of revenues - EMC's products are expensive). The fact that Symmetrix box revenues are purportedly included in the NAS revenues makes the divergence even greater, IMO.

While I think EMC's stated intention to enter the NAS market is significant for NTAP, I don't find the existing market share numbers significant for the above reasons.

Ownership percentage: Formerly EMC:NTAP 1:1, now 0:1.

Ron
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Ron I was interested in this part of your post "Ownership percentage: Formerly EMC:NTAP 1:1, now 0:1." Suggesting that you sold EMC and bought what?

I too own both, and bought more NTAP today. Ratio now 1.5:1 NTAP:EMC Wish I had more $$$$. Jim

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No. of Recommendations: 2
EMC:NTAP was 1:2, now it's 1:4 (liquidated EMC in IRA and redeployed in NTAP in December), and going, like rchampoux, to 0:1 in six weeks when tax situation makes switch favorable.

Obviously, I think EMC will lose this battle. Not without some sort of fight, but I think NTAP's product, and NTAP's management, is up to it. Read Innovator's Dilemma to learn how difficult it is for incumbents to cannibalize existing businesses which they dominate against threat from a focused and determined competitor with a disruptive technology. In order to succeed against NTAP, EMC will have to embrace a technology that in large measure will hurt their position in another market, and one they dominate. It's the ultimate conundrum.

Also, Ron's post in previous thread I believe is correct with respect to how EMC is overstating market share. It would be hard for me to believe that they increased penetration in the NAS market by more than 100% when 6 or even 3 months ago EMC was dismissing NAS as a niche market. I would think such a market share improvement would have required more effort than, even for a market leader.

--fox
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