A Big Deal for Big Data

05/30/2013 7:00 am EST

Focus: STOCKS

Rob DeFrancesco

Founder, Tech-Stock Prospector

A new joint venture has the potential to send this company further "into the clouds," and with it the stock, says Rob DeFrancesco of Tech-Stock Prospector.

EMC's (EMC) CEO Joe Tucci is one of the ultimate tech dealmakers. After all, he is the one who orchestrated the purchase of virtualization specialist VMware (VMW) in January 2004 for $625 million, and the subsequent IPO three and a half years later.

Today, VMware—still roughly 80% owned by EMC—has a market cap of around $33 billion, and is projected to post 2013 revenue of $5.2 billion.

In the middle of March, Tucci announced EMC's Pivotal joint venture with the VMware subsidiary. The new company, focused on data analytics and cloud applications, will be 69% owned by EMC and 31% owned by VMware.

Made up of pooled assets from both EMC and VMware (Pivotal Labs, Greenplum, vFabric, SpringSource, Gemstone, Cetas, and Cloud Foundry), Pivotal will be run by former VMware CEO Paul Maritz. The thinking is these Big Data assets would sell best if they were all marketed together under one roof.

Research firm IDC estimates that Big Data's worldwide market is growing at a CAGR of 31.7%, and will reach $23.8 billion in 2016. Pivotal is estimated to have 2013 revenue of $300 million. The goal is to reach $1 billion in revenue by 2017 and eventually take the company public.

Greenplum is the core EMC asset. In January, EMC announced a major enhancement to Greenplum DCA, the first appliance-based Big Data analytics offering, with a redesign that enables analysis of both structured and unstructured data together within a single integrated unit.

The new solution greatly expanded the system's analytical capabilities (70%-plus performance gains for data loading and scanning, as well as a doubling of the performance for concurrent query workloads compared to the prior-generation offering) at a fraction of the total cost of ownership of competitive solutions from Oracle (ORCL), IBM (IBM), and Teradata (TDC).

Wall Street generally applauded the financial engineering behind Pivotal. Thanks to the repositioning of some of its operating units over to Pivotal, VMware was able to boost 2013 operating-margin guidance to a range of 32.5% to 33.5%, from previous guidance of 31% to 32%.

According to Needham & Co., the carve-out is a positive for VMware, because it enables the company to focus on virtualization and "early cloud" buildout, while moving assets associated with "mature cloud computing" over to Pivotal. VMware now projects revenue growth of 15% to 20% for the 2014-2016 period, representing acceleration from 2013 guidance of growth in the 11.2% to 13.8% range.

Following the spinoff announcement, RBC Capital upgraded VMware to "Outperform" and raised its price target to $110 from $90, saying the Pivotal impact presents a better-than-expected path to accelerating revenue and margin expansion.

MKM Partners is cautiously optimistic, but prefers to wait for Pivotal to start gaining traction, which will then present better visibility into 2014.

As for EMC, Oppenheimer & Co. recently said its checks indicate the company is seeing solid demand in the US and Europe for its VNXe storage platform aimed at smaller businesses. Over the longer term, EMC has plenty of growth potential in SSD, as more enterprises adopt that newer technology.

At this point, EMC shares are more closely tied to what is going on at VMware. That's because VMware shares were hit hard in January, falling 21% in one session following weak first-quarter guidance.

A gradual recovery at VMware (the stock is still off 18% YTD) would bolster EMC shares, which recently traded at 12.4 times the 2013 consensus EPS estimate of $1.86, or 1.3 times the expected earnings growth rate. For 2014, analysts on average see EMC earnings growth accelerating to 11.2%.

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