At least in part, the Street is reacting to Tuesday morning’s downgrade of Marvell (MRVL) by Barclays Capital, which as I noted earlier was in response to indications from Taiwanese component makers of a slowdown PC demand. Barclays chip analyst Romit Shah wrote that ““every company that we met with [in Taiwan] indicated that PC order rates are slowing into the back-to-school season.”
Meanwhile, Collins Stewart analyst Ashok Kumar Tuesday notes new data on drive production that he thinks raises ominous clouds for Seagate in particular. Kumar says data from Techno Systems Research, a Japan-based market research firm, find that hard-drive unit production was down 18% sequentially in the March quarter, comparable to a 15% decline in PC shipments. But he adds that Techno sees drive production increasing more than 20% sequentially in the June quarter, well ahead of the mid-single-digit decline he sees in PC unit shipments for the quarter. If those estimates are right, he says, the drive industry will have replenished the inventory workdown and then some.
Kumar says that Seagate’s production in April was up 3% from March despite moderating sell-through. He also notes that Hewlett-Packard (HPQ) exited its April quarter with six weeks of PC channel inventory, up a week from the previous quarter. “If Seagate does not exhibit production discipline,” he writes, “the industry could tilt into oversupply.”
Indeed, Kumar contends that if there is not a seasonal pick-up in demand later in the year, “there is risk that Seagate may violate its debt covenants.” He says Western Digital is “the best house in a bad neighborhood,” bu that despite “stellar execution,” it remains “exposed to the supply/demand vagaries of the industry.”
Avian Securities research chief Avi Cohen writes that he’s also seeing evidence of slowing PC order rates, with processor inventory rising, panel prices falling, memory demand declining and printed circuit board demand decelerating. He says it is unclear if the slowdown is due to a return to more seasonal factors after a strong inventory replenishment, or “something more negative.” However, he remains bullish on the drive stocks, asserting that supply constraints remain due to very low inventory levels, “supporting strong pricing and continued improving fundamentals.”
In Tuesday’s trading:
- STX is down 72 cents, or 7.6%, to $8.74.
- WDC is down $1.69, or 6.5%, to $24.22.
- MRVL is down $1.13, or 9.3%, to $11.