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Wednesday, August 16, 2006

EMC: The Ten Percent Solution.


EMC’s stock opened at $10 on Friday. Today it closed at $11. Up 10% in three trading days. What happened?

VMWare, a division of EMC, has been building software based on “virtualiztion”. This allows a server running one OS like Windows to run programs made for another operating system like Linux. The software installs core components of one OS onto a machine running the other, allowing programs to be transfer. It emulates the OS instead of transplanting it.

VMWare has gotten some PR on this application recently. This includes an article from that points out that VMWare was $157 million of EMC’s revenue in Q2, growing 73% over the year earlier.

The issues with VMWare are fairly simple. Other companies like Microsoft are moving into this arena and EMC is a company that does over $2.5 billion a year. VMWare can be a good performer, but that will not make a great deal of impact anytime soon.

EMC’s Q2 2006 numbers disappointed almost everyone. Revenue was $2.575 billion and operating income was $265 million. Each of the three immediately previous quarters was better.

Wall St. is also not excited about the amount that EMC paid for software security company RSA. EMC is paying over $2 billion for a company that had total revenue of $94 million in Q2 and $2.1 million in operating income. That does seem expensive.

Wall St. likes to look for complicated reasons that cause stocks to go up and down. EMC may benefit from something more basic. A number of tech stocks rose with Cisco’s earnings, and EMC may just be oversold. The company’s stock has dropped from $14.75 to $9.44. So, at $11, it has had a little run. Too bad that there is not a more complex explanation, but there does not seem to be.

If the bump in the stock is a small move up in an oversold stock that trades in a tech sector that is having a little rebound, don’t expect it to go much higher. There aren’t any other reasons for it to go up.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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