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EMC faces tough questions from analysts

The data-storage giant's analyst meeting is shaping up to be a confrontation between demanding investors and a company in need of some tough love, analysts say.

EMC's analyst meeting is shaping up to be a confrontation between demanding investors and a data-storage company in need of some tough love, analysts said.

The meeting, to be held Wednesday and Thursday in Boston, will see a change in tone for the storage giant, which has been typically an upbeat affair. Wall Street analysts will be looking for evidence that EMC can reload to fend off rivals and gain when the economy recovers. Shares were up 10 cents to $19.63 Tuesday, down from their 52-week high of $104.93.

In its second quarter, EMC said the storage market has become much tougher. The company managed to hit estimates that quarter, but had already lowered them in a surprise profit warning.

EMC was also mum on projections for the upcoming quarter, something that analysts say investors should be cautious about. Pricing issues and margins will also give the storage giant's investors plenty to hash out at the meeting.

"We expect investors to be pretty harsh with EMC," wrote Goldman Sachs analyst Laura Conigliaro in a research note. But the confrontation will also be "constructive," the analyst said, as EMC will become "a stronger competitor" if it can answer investors? demands about issues such as "sustainable growth and margins, pricing, competition and near-term user demand."

Gross margins are also likely to be an area of concern. EMC?s gross margins have plummeted over the past two quarters, from 59 percent in the December quarter to 47 percent in the June quarter. While this looks like cause for alarm, Conigliaro said margins could actually start to improve starting in the upcoming December quarter.

Banc of America Securities analyst Shaw Wu, who rates the stock a "buy," also said there are some issues that need to get hashed out at the meeting. The most glaring is hardware pricing, which has deteriorated through price wars with competitors like IBM and can only be improved through product-cycle upgrades, the analyst said.

Wu predicted that the meeting will be upbeat overall, though the company will not provide new projections for the current quarter, something which should make investors cautious. EMC didn?t provide any projections during its last earnings announcement either.

Other analysts have also remained cautious on the stock due to its lack of projections. First Union Securities analyst Andrea Grosz initiated coverage on the stock with a "market perform" rating Tuesday due to the lack of estimates for 2001. With the stock trading at 54 times 2002 earnings estimates versus a historical average of 34 times estimates, there isn?t much room for the stock to appreciate, she added.