Analyst Sees Enterprise Flash Changing the World of Storage (UBS, EMC, NTAP, IBM, HPQ, DELL, WDC, STX)

The team at UBS reports that information technology executives tell them that storage technology is undergoing more change now than in the past 10 years cumulatively. In their opinion, increasing use of flash drives is the most important trend for the next few years. The question whether flash is a disruptive or sustaining innovation is critical to assessing whether incumbent vendors can successfully adapt or whether storage upstarts will displace them.

Flash is an important new technology for the enterprise that will reduce, though not eliminate, the need for hard disk storage. NAND flash supply, though not sufficient to replace a high percentage of all hard drives, is enough to have a significant high-end enterprise impact.

So who will be the first to integrate flash to their storage products. The likely candidates are, of course, the industry leaders.

EMC Corp. (NYSE: EMC), which closed yesterday at $24.30, has a Thomson/First Call price target of $30. Many firms believe the stock is very undervalued as its large ownership percentage of VMware Inc (NYSE: VMW) is not fully appreciated.

NetApp Inc (NASDAQ: NTAP) is another storage firm likely to incorporate flash to their product line. With industry leading network storage solutions, NetApp closed yesterday at $34.55 and has a Wall St. consensus price target of $40.

UBS also expects that International Business Machines Corp. (NYSE: IBM), Hewlett-Packard Co. (NYSE: HPQ) and Dell Inc. (NASDAQ: DELL) will incorporate these new technologies in an effort to win back storage share. But UBS is of the opinion that these companies face an uphill battle in this storage war.

There is also the question of who could lose in this proposition? If there is lower demand for hard drives, both Western Digital Corp. (NASDAQ: WDC) and Seagate Technology PLC (NASDAQ: STX) could lose market share. This could make for an interesting pair trade. Investors buy the stock of EMC or NetApp and sell short an equal amount of shares in one of the disk drive makers.

The bottom line for investors is new technology that expands capacity and capability will always win. Integrating flash to storage is an example of the kind of new technology that can help change the face of an industry.