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Data Storage Valuations Remain At Low Levels; An Exclusive Interview With A Piper Jaffray Analyst Reveals The Top Stock Picks For The Industry

67 WALL STREET, New York - February 21, 2012 - The Wall Street Transcript has just published its Data Hosting Centers & Data Storage Report offering a timely review of the sector to serious investors and industry executives. This Data Hosting Centers & Data Storage Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Data Storage Spending Trends - Data Center REITs - Infrastructure Upgrades and Consolidation Activity - Big Data, PCIe Storage, Cloud Computing and the Virtual Desktop

Companies include: Fusion-io (FIO); Brocade (BRCD); Cisco (CSCO); CoreSite (COR); Dell (DELL); Digital (DLR); DuPont (DFT); EMC (EMC); Emulex (ELX); Equinix (EQIX); Google (GOOG); HP (HPQ); IBM (IBM); Intel (INTC); Juniper (JNPR); Microsoft (MSFT); NetApp (NTAP); OCZ (OCZ); Rackspace (RAX); Seagate (STX); VMware (VMW); Western Digital (WDC) and many more.

In the following brief excerpt from the Data Hosting Centers & Data Storage Report, expert analysts discuss the outlook for the sector and for investors.

Andrew Nowinski rejoined the technology research team at Piper Jaffray & Co. as a Research Analyst in August 2011, after spending 12 months at Raymond James. Mr. Nowinski had joined Raymond James to launch coverage of the storage sector, having spent the previous three years at Piper Jaffray co-covering the storage and networking sectors. Before his sell-side experience, Mr. Nowinski spent 10 years in the IT industry doing software development for various companies, including Accenture and IBM, formerly PricewaterhouseCoopers. Mr. Nowinski earned an MBA from the University of Minnesota in 2006.

TWST: You mentioned you like NetApp's current valuation. How are valuations trending for the other names?

Mr. Nowinski: If you look at EMC (EMC) and NetApp (NTAP), they both have low valuations at this point. EMC just reported a solid Q4, but is still trading below the three-year average of 16 times. Extracting VMware (VMW) from their valuation indicates that their core storage business is trading at just 8.7 times 2012 estimates, which is barely above the trough value of eight times. On a consolidated basis, EMC trades at just 13 times, which is well below the three-year average of 16 times and well below the four-year average of 18 times. So I think you could argue that that valuation for EMC is also pretty depressed.

On the flash storage side, if I look at Fusion-io, it has an extremely rich valuation, trading in excess of 50 times estimates right now. But arguably, they are growing earnings right along that clip in excess of 50%, so I think their valuation is warranted. That said, I believe I'm one of only four Analysts with a "buy" rating on Fusion-io at this valuation, out of the 16 Analysts covering Fusion-io. So sell-side sentiment is definitely more skewed to the "hold" rating, based on the rich valuation. Nonetheless, I think the Street underestimates the opportunities that Fusion-io has at Facebook, which could easily double revenue and earnings estimates over the next two years.

TWST: What stands out for you from the most recent quarterly earnings reports - any particular highlights or themes or an overall tone from the management teams?

Mr. Nowinski: Heading into Q4, EMC and other IT hardware vendors suggested Q4 may be a tick below normal seasonality - I think was the general trend. We heard that from CDW as well, one of the largest resellers in the world, which suggested that demand might come in a little below normal seasonality in Q4. But so far, of the data points that we've seen are counter to this trend, with the two biggest bellwethers being IBM (IBM) and Intel (INTC) having both announced better-than-expected results. EMC also printed a solid Q4 and exceeded estimates by $84 million. Our proprietary Q4 VAR survey also suggested strong demand, particularly for EMC and NetApp, though NetApp was slightly stronger than EMC in the quarter.

Despite the sentiment suggesting Q4 might be a bit weaker than normal, I think the data points we've gotten so far as well as our channel checks have indicated that that's not turning out to be the case. I think demand is in line with normal, if not better than normal, seasonality.

TWST: Has there been any other noteworthy news or announcements from any of these companies that points to changes in the competitive landscape?

Mr. Nowinski: Noteworthy news that I would point you toward would be the flooding in Thailand. That has clearly impacted the supply of hard disk drives. Both EMC and NetApp have increased prices 5% to 15%, effective in January and February, respectively. While EMC is confident they will have enough supply to meet demand, I think many of the smaller storage vendors will be at a disadvantage. In addition, low-end platforms that rely on high-capacity SATA drives will also experience significantly extended lead times.

TWST: What can investors expect in terms of returns this year?

Mr. Nowinski: In terms of returns, the way I think about it is that EMC clearly outperformed NetApp in 2011, though both stocks actually underperformed the Nasdaq index. Shares of EMC declined 5.9% in 2011, while shares of NetApp actually declined 34% in 2011, versus a modest decline in the Nasdaq of 1.8%. So you can look at that and say EMC's superior performance over NetApp was largely driven by the fact that they launched 41 new products in January of 2011, which enabled strong revenue acceleration and market share gains.

NetApp didn't launch any new products until the end of the year with their new low-end 2240 and their 8.1 operating system is still not generally available. Looking ahead to 2012, I think investors will see a reversal of these trends, where NetApp outperforms EMC, and that again is based on the three new product cycles mentioned earlier, in addition to their single-digit comps that start in the July quarter. EMC doesn't have that luxury, and has much more difficult comps this year. I do believe that EMC will continue taking share from several OEM vendors in 2012, but NetApp will also do the same, and I think they will also post accelerating product growth during that same time period, which should enable the stock to outperform EMC in 2012.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Data Hosting Centers & Data Storage Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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