Western Digital (NASDAQ:WDC), one of the leading manufacturers of hard disk drives, has collaborated with SanDisk (SNDK), a flash memory or NAND market leader, to launch its first hybrid disk drive (SSHD).  The move comes as the storage device maker catches up with its largest competitor Seagate (NASDAQ:STX) to tap the expected surge in demand of SSHDs. Below we discuss how the deal could benefit Western Digital going forward.
We have a $64 price estimate for Western Digital, a slight premium to the current market price. Western Digital’s stock has risen over 30% this year.
Demand For Hybrid Drives Are Expected To Surge
SSDs have a few advantages over conventional HDDs as these drives allow for faster data access and are very thin compared to HDDs. However, SSDs are currently much more expensive per GB than HDDs, leading to slow adoption of SSDs as primary memory components in drives. On average, SSDs are at least twice as expensive as regular HDDs and this cost differential is causing price-conscious retail consumers to stick to devices with HDDs. In addition, while developing and expanding cloud infrastructures, capacity generally matters more than speed for most enterprises. For the next couple of years, SSD production costs are likely to remain high, which will continue to act as a barrier to any huge pick up in SSD demand. However, new hybrid drives (a combination of SSD and HDD) are gaining traction as they have performance and size comparable to SSD drives while being relatively cheaper.
PC and notebook demand is expected to revive in the second half of 2013  as consumers who have been delaying purchases due to macroeconomic conditions could start spending more as the economy recovers. In addition, the growth in cloud computing and network attached storage is boosting storage demand from enterprises (read Western Digital’s Robust Growth And Outlook Support $64 Value). These factors, coupled with an increase in SSHD options as more manufacturers enter the market, will lead to substantially higher demand for SSHDs in the next few years. Western Digital is trying to tap this expected boom in demand as it prepares to launch the world’s thinnest (2.5-inch) hybrid drives. 
How SanDisk Can Help Western Digital?
One of the primary components of SSD is NAND, a type of flash memory, the supply of which can be rather sporadic. Electronics giants like Apple and Samsung are the major buyers due to NAND’s use in smartphone and tablets. Further, with various manufacturers announcing cuts in NAND production, the market could witness supply constraints in the near term.  This is where Western Digital can gain from the deal with SanDisk as overall NAND demand is expected to increase by 45% in 2013 mainly due to rising sales of smartphones and tablets. 
Initially, SSHDs are expected to target mostly original equipment manufacturers (OEMs). Should rapid demand from smartphones and tablet sales outpace NAND supply, this could interrupt the production of SSHDs. Restarting idle NAND supply or adding additional capacity takes time and the supply would likely come into the market with a lag. This in turn could hurt OEMs’ production of PCs and notebooks.
Therefore, OEMs would likely prefer to buy SSHDs from a manufacturer that is relatively insulated from potential supply issues. SanDisk has a joint venture with Toshiba for NAND production getting 49% of the total production. Therefore, by tying up with SanDisk, Western Digital will gain access to a steady NAND supply. This could help Western Digital make more progress in the hybrid drive market despite Seagate’s first mover advantage.
Disclosure: No positions.