EMC is a leading provider of hardware, software, and services for enterprise network storage. Historically focused on proprietary storage hardware, the company has recently increased its focus on its software and services segments, with its VMware subsidiary becoming an increasingly material contributor to profitability. EMC’s revenue contribution by segment is approximately storage (74%), VMware (19%), information intelligence (4%), and security (4%).
Cloud transforms IT
Cloud computing is transforming IT by dramatically by reducing the costs of hardware and simplifying how we move data and applications. EMC introduced the idea of “private cloud”—the journey to transform our customers’ data centers into flexible, scalable pools of on-demand virtual infrastructure that they control. Customers also want to realize the benefits of public clouds, leading to a growing set of service providers that deliver highly specialized services for a particular industry, geography, or application from their cloud data centers. We call the ability to federate and spread workloads securely between private and public clouds “hybrid cloud computing.” Our mission is to lead customers on the journey to hybrid cloud computing.
Big data transforms business
Big data is transforming business by allowing customers to gain deeper insights through correlating and analyzing structured data, unstructured data, and data from public sources in ways that were previously impossible. Given the volume and variety of big data, and amount of change it undergoes, traditional architectures and tools can’t deliver on the big data opportunity. Customers need a new approach.
EMC has identified a simple three-step journey to help customers capitalize on the big data opportunity:
Phase I focuses on the storage/analytics infrastructure. Phase II involves the people and processes for analyzing and interpreting data sets. Phase III focuses on becoming a predictive enterprise—the technology and the people that make big data a part of the way you do business.
EMC currently has $2.64 of cash flow per share which makes the current price of approximately $24 attractive.
While the technicals are not extremely favorable I like their business model and their future growth prospects. Coupled with strong support around $23/share I feel comfortable utilizing the following option strategy of a covered call.
- I will be required to sell 100 shares at $24 ($2,400)
- Keep the option premium of $77
- Keep the capital gain/loss of $7
If EMC trades below $24 on Feb 16, 2013
- My options will expire worthless
- Keep the option premium of $77
If my options expire worthless I will instantly sell another set of covered calls on EMC Corporation, with a purchase price of $23.16 I will have a hard stop at $17.37 which is a very safe margin of safety in my opinion. At that price EMC would be trading for just 6.5 times free cash flow, that’s DIRT CHEAP!
I know some people may think risking $2,393 to receive $77 is foolish but let me point a couple things out.
- From now until Feb 16, 2013 is approximately 5 weeks.
- 52 weeks divided by 5 weeks = 10
- $77 divided by $2,393 = 3.21% return on investment
- If I were to conduct this type of trade 10 times a year it would = 32.17% return on my investment a year.
Here’s to our Wealth!