Seeking Alpha
Profile| Send Message|
( followers)  

I hear many analysts and investors citing solid-state drives as the downfall of companies like Seagate (NASDAQ:STX) and Western Digital (NASDAQ:WDC). The logic is that these two companies will become obsolete and profitless in a matter of years because they have not moved into the mobile/SSD market.

Here is a quote from S&P Capital IQ's Stock Report (March 16, 2013):

Our sell recommendation reflects our view of deteriorating fundamentals for hard disk drives and our belief that consensus earnings expectations are too high. We think demand for hard disk drives will be hurt by the emergence of tablet computers, which use solid-state drives.

At first glance, it seems a valid argument. While they could be right about earnings expectations being too high, there are a few problems with their other line of reasoning. These solid-state drives do cut into Seagate's desktop drive market share, but Seagate has been non-responsive to the solid-state market for several good reasons:

  1. They know better than to sink a bunch of money this late in the game into a market that delivers low profit margins, and
  2. Desktop and other personal-level drives are no longer the main component of their gross sales and profits.

The true source of revenue here for STX is the sale of cloud storage drives. Every day demand for cloud storage increases at an almost exponential rate. The more people that get connected to the internet, the more storage is needed, for everything from e-mail to personal data like pictures and videos, to business applications that need to be readily accessible anywhere, at any time.

Google (NASDAQ:GOOG), Amazon (NASDAQ:AMZN), and to a lesser extent, Apple (NASDAQ:AAPL) have been battling it out over the cloud storage market. Guess who the real winner here is? That's right. I'm willing to bet 95% of the drives used for that storage are made either by Seagate or Western Digital.

That's only the beginning, though. Both Seagate and Western Digital have essentially hit critical mass in terms of storage per unit area as well. We've known about this physical limit for a while now.

Note the date in that article: 2001.

Engineers have hit a wall, not due to lack of technology or lack of innovation, but due to the physical limits of the material used to store data. While there are several promising ideas that could increase storage per unit area by several orders of magnitude, these ideas are years from being cost-effective. In addition, Seagate has been leading the development of these next-generation drives. Should this technology become viable, it will be Seagate that releases the first production drive of the HAMR variety. In any event, Seagate has their place in the cloud computing market secured.

Barring these HAMR drives becoming viable (which, as mentioned above, would be yet another boon for Seagate), there is only one other solution to increased storage demand: Seagate must manufacture more and more of the current drives.

This is where the viability of a long position in STX comes into view. There is a growing market for their product, and competition is relatively low. Once investors begin to understand Seagate's new role in the world, the stock price should appreciate nicely as well.

Seagate may not have desktop drives flying off the shelves like they used to, but they now have an even larger market to deliver to: the storage needs of the entire world.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in STX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I sold my stake in STX on the 14th of March, after a nice run up in price from the February lows. I plan to re-take my long position before the next dividend.

Source: Why Seagate Will Continue To Grow