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Google wants to put your life online
The search giant wants to store your entire life's data online. That's just part of a boom in data storage. Here's how investors can play the trend.
By Jon D. Markman
Would you give your life to Google?
For millions of Internet users, this question is moot. The online search company already has become the repository for two gigabytes or more of their e-mail, photographs, IM chats and blogs. Without really thinking about it, they have allowed Google (GOOG, news, msgs) to save many of their most intimate personal conversations and digital memories on a network-attached disk drive somewhere in its unregulated, little-scrutinized Web netherworld.
Now it turns out that two gigabytes might be just the tip of the iceberg, for technology circles are abuzz with rumors that the Silicon Valley goliath has plans to launch a service called Gdrive that would allow users to shelve every scrap of digital property they own, small or large, in a Google-owned data warehouse -- possibly for free.
Snapped 500 photos on vacation? Save them to Gdrive. Built a 9,000-song music collection? Save it to Gdrive. E-mailed love letters, did math homework, typed out a grocery list and watched the webcast of a ballgame? Save it all to Gdrive. Want to show all this stuff 40 years from now to the grandkids from your hydrogen-powered wheelchair? Log onto Gdrive.
The concept of allowing Google -- or some other major Internet outfit -- to access your life is either really great or really scary, depending on how much you trust them to safeguard your secrets. To be sure, it would be convenient to have every picture and document available at the push of a search button from any computer in the world for the rest of your days and well beyond. But it would also be incredibly frightening to consider that all of your stuff is just a seven-letter password away from falling into the hands of any business rival, divorce lawyer, wayward child or identity thief.
D'oh, and dough
I was watching an episode of "The Simpsons with my son this weekend in which Homer finds his wifes Memory Chest in a closet, and discovers that it holds unsettling secrets about their courtship. Hilarity ensues. But in real life, it might not be so funny if the stark reality of youthful views and indiscretions -- as opposed to hazy memories and hidden papers -- were readily available years from now. No longer will you be able to conveniently lose a box of correspondence after ending a business or personal relationship. It will all be digitally sealed in a never-ending time capsule -- and possibly in duplicate or triplicate if the recipient of any of your mail or documents is also a Gdrive customer, or has forwarded them to other customers.
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Im going to let the ethicists puzzle out the implications of memories that never fade. Ill let the technologists decide whether virtual online storage might allow Google to usurp the role of the personal computer and its operating system as the center of gravity for modern men and women. And since nobody outside Google knows yet what Gdrive really is, I'll hold my fire on what it means for the trend.
My more immediate concern, as a financial columnist, is how you might make a buck off this. And it just so happens that I do have some ideas.
First, however, you need to know that technology stocks generally are in trouble this year. A couple of weeks ago, Intel (INTC, news, msgs) announced downside guidance for its business, as it appears the vast personal computer complex is in suspended animation in advance of the release of the new Vista operating system from Microsoft (MSFT, news, msgs). (Microsoft is the publisher of MSN Money.)
Uncle Sam wants storage
Tech investors have been very slow to get over the PC as an investment and focus more intensively on the demand for data storage.
Its not just consumer and business e-mail, multimedia and documents. Theres practically a government mandate to make money in storage technology companies, as there are regulatory requirements and corporate policies mandating long-term data preservation. The research firm IDC says that worldwide, companies shipped 831 petabytes worth of disk-storage systems in 2003, but are expected to ship 5,444 petabytes in 2008 -- a compound annual growth rate of 46%. (A petabyte is one million gigabytes of information.) IDC says that companies are spending an increasing part of their budget on storage hardware and software, with the gross global bill expected to rise to $75.3 billion in 2008 from $56.6 billion in 2003.
Not all of this stored data is of equal value, so a large industry has grown up to offer a variety of access, prioritization and protection at a range of price points. And that is where technology investors need to focus right now for growth and value.
A '90s survivor
Ive got two companies that appear rather attractive now -- one a familiar large cap, and the other a somewhat obscure but important, and cheap, small cap.
The first is EMC (EMC, news, msgs), which those of you who have been around awhile will recall as one of the three greatest success stories of the 1990s. It was much, much more than the Google or Apple of its time, rising a stunning 65,740% from January 1990 to January 2000.
Since then EMC is off 73%, but the entire decline occurred in 2001 and 2002, and business has actually been great lately. After a period in which growth had slowed, its legendary sales teams focus on large- and medium-sized companies need for fast, economical and reliable storage has pushed earnings up 22% again. If EMC brings in 75 cents a share in 2007, which is the conservative consensus estimate, its shares are going for a multiple of just 18, which is very low for a company with its track record, management and growth prospects.
One reason for the small multiple, according to an analysis at Sanford Bernstein, is that the company is carrying an unusually large amount of cash -- about $3 a share. Bernstein notes that if EMC were to just announce a large stock buyback, investors would return and shares would get moving again to keep pace with flashier peers like Network Appliance (NTAP, news, msgs). I think the fundamentals are in place for EMC shares to earn up to 80 cents in 2007, and EMC deserves a 23 multiple. If that happens, the stock could break out of a four-year range and get back to $18 over the next 12 months, which suggests the potential for 28% appreciation.
A small storage powerhouse
If that doesnt tickle your googlebone, then consider my small-cap choice: Xyratex (XRTX, news, msgs). Ill forgive you if youve never heard of this company. It was spun off from IBM in the early 1990s, is based in England and only went public on its own in 2004. But in the past two years it has established itself as a well-run technology powerhouse in two key fields: network-storage subsystems for Fortune 1000 businesses, and storage-disk testing infrastructure for its industry peers. Network Appliance is its largest customer for its subsystems, while Seagate (STX, news, msgs) and Western Digital (WDC, news, msgs) are its biggest test-system customers.
Xyratex is already growing at better than 15% a year, but forward estimates have been steadily rising over the past year as Network Appliances business has swelled and capital-expenditure budgets at Seagate and Western Digital are also on the march. The company has announced that 60% of its entire 2006 revenue guidance of $278 million to $292 million has already been booked, and analyst checks suggest that its factories are running at full capacity. The disk-drive business is changing and growing quickly in response to demand not just from online and PC demands, but also from television recording systems such as TiVo and portable media players such as iPods that require terrific, high-density 1-inch and 2.5-inch drives. The industry is also transitioning into new technology such as perpendicular recording, which has put a lot of demand on high-end testing.
Revenue at Xyratex has risen at 40% annually over the past five years, but even if that slows down by a third, the company appears capable of exceeding its relatively conservative earnings guidance. For some reason I cannot really fathom, the stock is trading at a price-to-earnings multiple of 11.5 on consensus 2007 estimates of $2.10 a share, well below the industry average in the mid-20s. Moreover, its price-to-sales multiple is 0.96, which is less than half the industry average.
If Xyratex can remain on track to earn as much as $1.90 in 2006 and $2.20 in 2007, which I think are conservative estimates, and comes to deserve an 18 multiple, which is still ridiculously low, then the shares, now at $23, could hit $39 in 18 months -- a 70% move. Store that forecast in your future Gdrive account, and let me know how it turns out.
Fine Print
"The Simpsons" episode that I referred to was the Emmy award-winning "Three Gays of the Condo." Read about it here ... To learn more about Xyratex, visit its Web site To learn more about EMC, visit its Web site.
At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.
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