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Jewish World Review Feb. 5, 2001 / 12 Shevat, 5761

Anjali Arora

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Why data storage stocks are still strong

http://www.jewishworldreview.com -- Perhaps the sexiest thing about the data-storage industry is its stocks. From EMC to Compaq Computer, storage stocks have weathered the past year's market carnage better than most other tech sectors, resulting in high visibility for companies that do otherwise invisible work.

The importance of storage services can be explained in one key word: data. Data traffic is expected to increase exponentially in coming years, a fact that should surprise no one (compare your e-mail activity today with what it was three years ago). That's information companies want to store and use, and they'll pay a premium for systems that do it.

"Storage is probably the most critical thing out there right now in terms of the hardware market, and I don't think many companies are willing to skimp in that area," says Joseph Beaulieu, senior analyst at Morningstar. "Companies are relying on the data that they gather about their customers and their purchases to go back and sell more products. These aren't just filing cabinets, where they stuff things in there and never go back and look at them again."

Hence the growth of the overall market. Storage is currently a $44 billion business, according to Gartner Dataquest, and is forecast to double to $88 billion by 2004. The largest growth is in the areas of storage area networks and network-attached storage; both markets are expected to grow at rates upward of 50 percent in coming years.

That rise reflects both a general migration toward a networked environment and a corporate switch from host-based storage (handled on a company's internal server) to external networks. Also poised for growth is storage-management software, a business expected to grow at an annual rate of 28 percent for the next five years.

While the sheer size and potential of the storage market are sure to promote fierce competition, so far there is one name that analysts say is synonymous with the sector: EMC. The company's stock performance might be reason enough to pay attention; it's returned more than 3,000 percent in the last decade and now sports a market cap of $172 billion. (That's huge: about $100 billion more than Hewlett-Packard, for instance, and just a bit behind IBM, at $204 billion.)

But EMC also has managed a 16 percent market share and has repeatedly turned in strong earnings. The company consistently tops estimates; that's one reason it trades at a gaudy 70-plus times estimated 2001 earnings of $1.03 a share. Observers say a laser-like focus is responsible for the company's achievements; while its competitors struggle to establish a niche in one part of the market, EMC is all storage, all the time.

Despite its formidable position, EMC is not quite the only game in town. Veritas, a leading storage-software maker, is a strong competitor that could prove a bigger threat in coming years. Network Appliance has a small but solid foothold in network-attached storage, while Brocade Communications Systems stands strong in the networking arena. And of course there are the bigwigs like Compaq, IBM and Hewlett-Packard, which go head-to-head with EMC for the core business of storage area networks.

The storage market enjoys one more, perhaps crucial, advantage: It should be relatively immune to the spending cuts that will affect the IT industry should the economy slow.

Anjali Arora writes for The Industry Standard. Comment by clicking here.

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