Stifel Warns of Trouble Ahead for Enterprise Storage Stocks

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For years, the growth of enterprise storage and the stocks that were the leaders continued almost unabated. But changes in technology and information technology (IT) budgets around cloud computing and other areas of storage and networking have started to change the game for many of the top stocks in the sector. The analysts at Stifel highlight those changes in a new report that examines some of the negatives that are showing up in the storage sector. They also point out the softness that was associated with some recent earnings reports.

The big question for investors is whether to continue to own and buy the stocks or to move on to new names in the storage arena. It just turns out that as the giant migration to the cloud takes place, there are some big risks associated with some of the historic storage leaders up and down the food chain. Here are some of the stocks covered in the Stifel report.

Arrow Electronics Inc. (NYSE: ARW) actually beat the Wall Street estimates for earnings for the first quarter, but overall revenues came in light. They were hit by low demand in Arrow’s storage and servers business globally. Revenues from America declined 10.0%, while those from Europe declined 11.0% on an adjusted basis. The Stifel team sees the potential for an improved second quarter, based on Arrow commentary, and a longer selling cycle in April to start the quarter. The Thomson/First Call price target for the stock is $58.73. Arrow closed Wednesday at $54.70 a share.

CommVault Systems Inc. (NASDAQ: CVLT) reported weaker-than-expected first-quarter earnings, and it could see orders getting pushed out further this year. The company also may be facing an investigation into alleged securities violations, another negative for current and potential shareholders. The consensus price target is $62.53. The stock closed Wednesday at $49.23.

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Datalink Corp. (NASDAQ: DTLK) posted horrible earnings and the stock traded down almost 25%. Not only did results come in below Wall Street estimates on the top and bottom line, the company gave second-quarter guidance that was below estimates as well. The management team said deals were pushed out and customers may be looking at other storage solutions or storage delivery models. The consensus price target is a lofty $16.40 and may be headed much lower. Datalink closed Wednesday down huge at $9.39.

EMC Corp. (NYSE: EMC) reported that information storage revenue was down 3% year-over-year. The company may be the victim of customers extending their product refresh cycle past the typical three-year period. For investors, the company’s large ownership position in VMware may help to take some of the sting out of slowing enterprise storage growth. Investors are paid a 1.8% dividend. The consensus price target is $30.07, and EMC closed Wednesday at $25.28.

NetApp Inc. (NASDAQ: NTAP) is another name getting hit because the outlook for storage spending continues to look mediocre as users pause to consider their alternatives. While a storage upgrade could be in the cards, which would benefit NetApp, it is facing the same problems as its competitors as start-ups and new technology are emerging with better and more cost-efficient alternatives. The consensus price target is $42.89. NetApp closed Wednesday at $33.70.

The storage business as a whole is going through massive change, and investors long some of these stocks may want to rethink their theses for owning them. Like all sectors in the stock market, technology companies that do not see and embrace change can get left in the dust very quickly. With new storage alternatives available, change could be swift, and so could stock price declines.

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