This Company’s 10-Day, +169% Run is Heating up an Entire Sector

Investors in 3PAR (NYSE: PAR) can’t believe their good fortune. They woke up last Monday to find that their investment had nearly doubled in value after Dell (Nasdaq: DELL) announced plans to buy the data storage company. And this Monday morning, they got another gift when Hewlett-Packard (NYSE: HPQ) announced plans to outbid Dell, sending shares of 3PAR up another +44%. That’s a +169% gain since August 13th.

Wouldn’t that be nice if all of our investments worked out so well…

That hand has been played, but investors certainly think other quick profits can be made in the sector, and are bidding up shares of Compellent Technologies (NYSE: CML), Isilion Systems (Nasdaq: ISLN) and CommVault (Nasdaq: CVLT) in recent sessions. All three stocks are up +25% to +30% since last Monday morning. Investors are either foolhardy in chasing these names or on the cusp of picking the field’s next winner. Let’s take a look.

A storage pioneer
3PAR’s technology appeal is fairly obvious to industry analysts. The company has pioneered a new type of data management software known as “utility storage.” Until now, companies that need to manage large amounts of data could invest in either monolithic or modular storage. Monolithic systems (sold by firms such as EMC (NYSE: EMC)) are very expensive, take a long time to deploy, yet are very robust. Modular systems are much less expensive and can be used to add incremental amounts of storage management as networks grow, but are considered to be less robust. (The technology discussion is actually much more complex than this simplification, but you get the basic idea.)

3PAR’s approach actually marries the two by adding a range of software tools that help to better orchestrate all of the requirements that go into running a large mission-critical data network. This “utility storage” approach uses less power and lowers the level of needed IT expenses. Dell and HP both realize that lowering IT management costs while expanding capacity is the number one goal of their customers.

The rest of the pack
Along with 3PAR, Compellent Technologies had received a considerable amount of industry buzz in recent months. The company’s forte is “automated data-tiering,” which means that the most frequently used data in corporate networks is held in readily-accessible memory banks, not in less accessible disk drives. EMC has a similar offering, but some analysts think that Compellent’s technology is better. To acquire Compellent, any tech firm would likely need to have either no relationship with EMC or would need to exit that relationship. That rules out Dell, unless the company takes the money it hoped to use for a 3PAR deal and use it on Compellent and another firm, thus eliminating the need to rely on EMC.

Who’s that other firm? Perhaps CommVault Systems. CommVault already counts on Dell for roughly 25% of its sales, and the two firms jointly call on many of the same customers. CommVault sells a wide range of network and data management software on one lone technology platform. Rivals such as EMC have made a series of acquisitions and have never completely merged the disparate technologies, making for IT headaches. CommVault’s key selling point is that its software operates seamlessly and in a very low-cost fashion.

Don’t forget Isilon
Isilon Systems has quickly emerged as a viable alternative in an area known as network-attached storage (NAS). The NAS market was pioneered by NetApp (Nasdaq: NTAP), which has a market value and revenue base 10 times greater than Isilon’s. Yet some industry watchers think Isilon’s technology base is even more robust than its larger rival.

Isilon was a hot IPO at the end of 2006, but shares eventually lost -90% of their value thanks to a string of bad quarters. New management arrived in 2008, and the company has regained much of its lost mojo. Shares have risen more than +300% in the past 10 months and now trade for more than 50 times next year’s earnings. Shares are so pricey simply because investors believe Isilon would help a larger tech player make a big splash in this market. So they’re not paying for potential profits, but for the technology base — and frankly, it’s impossible to know what shares are really worth to a potential buyer — until that buyer emerges.

Action to Take –> Shares of Compellent are also quite pricey, and along with Islion’s shares, are hard to value. You may want to sit and wait for these stocks to return to earth. As time passes and no other deals emerge, shares of Isilon and Compellent are bound to pull back, especially if the Nasdaq enters another choppy phase.

In contrast, CommVault is the one you should keep your eye on for a buyout. The company may lack the technology buzz of those two smaller technology players, but it has a sizable customer base that could open plenty of new cross-selling opportunities for any large tech firms. As Dell regroups after the 3PAR bidding war, CommVault may soon move into its sights.