First, what is VMware worth on an per-EMC-share basis? Using yesterday's closing price for VMware, that is amounts roughly to $9 per EMC share. While there's certainly risk to using this very high figure, analysts remain very bullish on VMware's stock, and if the market remains robust, the stock stands to continue trading higher.
This leaves buying EMC's core business for about $10 per share. As a Caris & Co. analyst report notes, at $10 per share, the core business is fetching 16x earnings. With the data storage industry at 19x earnings, it certainly seems like there could be value.
There are also several catalysts in the works for EMC. For example, the company's content-management segment slowed greatly throughout 2007, but in the second half of this year and 2008 this business's growth (40% in late 2006) should surge with Documentum 6, an enterprise management platform, rolling out. In addition, Network Appliance's (NASDAQ: NTAP) recent guidance noted an improvement in "large enterprise accounts."
EMC is certainly a stock to watch in the next few quarters as its enterprise management business grows and the company's valuation seems attractive. If EMC can produce two to three quarters of solid earnings and VMware continues to prosper, a $25 share price certainly wouldn't seem unreasonable with the Street willingly pays 25-35x earnings for momentum names in the data storage space.
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