How to Value Storage
Perhaps it is time to begin buying storage on the basis of business value.
Recently, someone informed me that IBM had changed its self-description in its SEC filings from “hardware” company to “software and services” company. This came on the heels of another report, not validated at press time, that EMC’s sales of high-end arrays were down significantly, prompting the company to push the low end of its array line in order to generate revenues from small and medium-sized businesses that it could not glean from large customer sales in the current market.
Like IBM, EMC is also attempting to redefine itself as a software play, though it has not yet gone to any lengths to change its corporate description on Dun & Bradstreet. Despite the vendor’s apparent abandonment of its WideSky storage management “middleware” initiative (an outcome that has been ignored by industry analysts for some unknown reason), EMC continues to acquire software companies such as Legato, Documentum, and BMC Patrol Storage Manager, furthering its efforts to become a software leader.
A friend and former Wall Street analyst tells me that such repositioning is just for show—or, rather, for valuation. If I understand him correctly, publicly traded storage vendors who represent themselves as hardware companies tend to be limited in terms of acceptable market capitalization to one to two times earnings. Thus, on earnings of $1 billion, the hardware company can probably support a stock offering of about $2 billion without raising too many Wall Street eyebrows.
By contrast, a software company enjoys higher multiples. They can support a market cap of three to four times earnings and a price to earnings (P/E) ratio of 20 to 40 times earnings.
If you are not invested in technology stocks (and for the most part, I’m not), this may be meaningless to you. However, in the game of storage market share infighting, the valuation of storage technology is often interlinked with the valuation of the vendor stock. The big boys have more stock value than the little guys and often wave that stick when competing for a place at the table of a large customer account.
Interestingly, all of this information came to me on the heels of a phone call with a curmudgeony friend of mine in the storage reselling business. He reported that a large bank in Northern California had decided to heave its EMC gear out the door in favor of a NAS solution. He had been contacted to see whether he wanted the old Symmetrix boxes.
“I said that I didn’t want to pay for the used gear, and they offered to ship it to me at cost,” my friend reported. “So I called up a metals broker in New York and asked him, on the basis of scrap metal valuation, what I could sell the EMC boxes for on the open market.”
The response, he said, was interesting. The old EMC gear was worth 7 cents per pound on the open market … in China. “However,” he noted, “it would cost me 43 cents per pound to ship it there. So, I would end up losing 36 cents per pound on the deal, plus the cost to ship the gear to my site in the first place.” Based on his valuation, he had to pass on the storage.
Collectively, the above may seem a curious, though largely irrelevant, sidebar to a column focused on enterprise storage. I would argue, however, that it is on point.
Enterprise storage technology derives its ultimate value from its business utility. To have any real business value, it must deliver performance, availability, and accessibility to an application that, in turn, supports a mission-critical business process. Storage investments that do not deliver such benefits are properly valued at their scrap metal conversion rates.
Moreover, given the fact that storage must be managed to deliver any business value at all, and that storage management is primarily a function of software, the otherwise meaningless Wall Street valuation of software companies over hardware companies may actually mean something when it comes to enterprise storage acquisitions. Storage hardware alone delivers raw capacity, but software to efficiently allocate and utilize that capacity compounds the rate of return that can be gleaned from storage investments.
Perhaps it is time to begin buying storage on the basis of business value, rather than glitzy marketing and analyst hype. Your thoughts are appreciated. Write to me at: email@example.com.
Jon William Toigo is chairman of The Data Management Institute, the CEO of data management consulting and research firm Toigo Partners International, as well as a contributing editor to Enterprise Systems and its Storage Strategies columnist. Mr. Toigo is the author of 14 books, including Disaster Recovery Planning, 3rd Edition, and The Holy Grail of Network Storage Management, both from Prentice Hall.