After cloud ate EMC, more hardware makers to follow

Selling personal computers isn’t the only hardware business being left in the dust by innovation in the tech industry.

Growth in the sales of storage gear is also shriveling up as Internet-based computing, also known as cloud computing, cuts demand for servers and storage gear.

That technology shift is the main reason EMC, the No. 1 maker of storage equipment, is being folded into privately held Dell in a $67 billion deal announced Monday. The transaction comes after five years in which EMC’s stock price essentially has gone nowhere — trading between $20 and $30 a share since early 2011.

Sales estimates for this year and next, moreover, suggest the Hopkinton, Mass.-based company won’t be the last public hardware giant to disappoint longterm investors.

Sales of so-called data center systems are expected to climb just 1.8% this year, to $143 billion, market research firm Gartner predicted in January.

While still a large business, it’s now the smallest IT category tracked by Gartner and is growing slower than any other tech sector besides telecom services. The global IT industry is likely to grow 2.4% overall this year to $3.83 trillion.

EMC was expected to do slightly better, as analysts who cover the stock pegged its annual sales growth at 3.4% this year and 4.6% in 2016. Yet those expectations look to be overly optimistic, as EMC pre-released disappoint- ing third-quarter results Tuesday.

And EMC is not alone in facing a serious slowdown in storage sales. NetApp, a smaller rival in the storage equipment market, is expected to see its sales fall 5.2% for its fiscal year ending in April 2016. Its share price is roughly half of what it was five years ago.

Hardware makers that also sell PCs are expected to do even worse as sales of smartphones and tablets cut into demand for laptops and desktop computers.

IBM revenue is expected to drop 10.6% this year, and Wall Street has been cutting its 2015 and 2016 earnings estimates for the company over the last three months.

Hewlett-Packard sales, meanwhile, are seen falling 6.7% for the fiscal year ending this month. HP is about to be split into separate companies as it grapples with slower overall demand.

Meanwhile, cloud-computing giants Amazon and Microsoft are seeing sales of their Internetbased computing services explode, prompting consolidation among hardware makers.

While the Dell-EMC transaction values the storage maker about 28% more than it was worth before reports of the deal surfaced, not everyone is a winner. That includes shareholders of VMware, the leading maker of so-called virtualization technology that lets companies add more storage capacity using software, rather than hardware.

VMware is 80% owned by EMC, and its shares fell as much as 10% Monday because the deal is being financed in part with the issuance of new VMware shares that will significantly dilute the stakes of current investors.

Given the sales forecasts for this year and next, VMware shareholders won’t be the last hardware investors to face nearterm disappointment.