Buy EMC on Cisco Weakness

On February 6th, Cisco will be reporting it's eagerly anticipated 4th quarter results. While nobody really cares about their Q4 performance, many onlookers will gauge the health of corporate IT spending based off Cisco's outlook, and there are a few things to highlight:

1. Most IT budgets are performed towards the end of the 3rd quarter and validated in the early part of Q4. Given the market's weakness didn't rear it's true colors until December, it should be anticipated that '08 IT spending will not reflect current market conditions and should be very healthy. I expect Cisco to confirm this, however, they might be more cautious due to the nature of their product line.

2. To date, only pure play hardware manufacturers have seen weakness (i.e. Intel), and this should not come as a surprise given the underestimated power of virtualization. Software and professional services companies (i.e. IBM) have not seen any noticeable deterioration as their product portfolios focus more on reducing inefficiency and costs than relying on expansion and build-outs.

3. Any Cisco weakness will dent the entire enterprise tech sector, despite some clear trends unrelated to recession. They may be saved by continued growth in emerging markets, but I don't know if this can last forever as the world markets become cold.

If Cisco disappoints, expect EMC to be on sale due to it's sector relationship, but let me point out some clear differences:

1. While Cisco's growth is based off increasing network needs, EMC's growth is based off increasing amounts of data to store. Every macro business IT trend requires more data storage, availability, retention, and security. While Cisco is a pulse on economic growth and business strength, EMC is a pulse on a more stringent regulatory environment and enhanced records management requirements.

2. Sticking with end of life Cisco gear is far more acceptable of a risk compared to sticking with end of life SAN/NAS devices. When companies begin to layoff large amounts of staff, projects like data center expansions and network refreshes will be an early casualty, while the need for more storage remains as paper based workflows continue to go electronic. Less paper equals more storage requirements. While EMC is hardly immune to slowdowns in IT spending, it is no longer appropriate to use Cisco as a direct benchmark given the different trends in their core businesess.

3. Many will point out that EMC can't grow without Cisco given the 'network attached' definition of EMC's core business, however, the drivers for storage are far more bullish at this point than the drivers for network gear.

4. Cisco's acquisitions of WebEx and Scientific Atlanta, while excellent diversification for Cisco, don't come close to stacking up to the potential that a company like VMWare offers. VMWare's recent selloff, while perhaps deserved, now leaves a lot of upside for '08 results. Don't underestimate VMWare as the 1 yr chart shows what a difference their success can do for EMC price growth against CSCO


Who knows what Cisco will say next week, but if the jittery market doesn't receive it well then EMC should take an unnecessary hit. Any drop due to Cisco earnings will make EMC even cheaper and more attractive. Any less than $15 would price EMC emotionally bearish and not in line with fundamentals.

The main indicator to watch is going to be enterprise IT budgets for 2009, as a full blown recession will mean very bad things for the entire sector regardless of what products they sell. We will not get any clarity into this until Q3 at the earliest, hence why EMC looks to be a strong buy for the next several months.

Don't get me wrong, Cisco is a wonderful company and is well position in the long term. It is a core holding and should be added to upon pullbacks, but in the short term it could be in for some tough times that I don't see EMC experiencing.