2 Winners In A Difficult Industry, Which Is Still A Buy?

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 |  About: Western Digital Corporation (WDC), STX
by: Top Economic Articles

Seagate Technology (NASDAQ:STX) and Western Digital (NASDAQ:WDC) are in a highly competitive and mature segment of the technology industry. Their main products, hard disk drives, sold to original equipment manufacturers, are characterized by unstable and unpredictable product demand; rapid technological changes and product obsoleteness; rapid imitation and market saturation; price and margin erosion; and a constant threat from alternative products. Nonetheless, the two companies have survived and thrived. And Wall Street has taken notice, as the stocks of both companies have outpaced the S&P500 by a wide margin. How did they do it?

By acquiring ailing and genuine competitors; and by forging collaborations with customers and competitors.

Acquiring ailing competitors allowed both companies to amass the right scale and market share fending off price erosion. meanwhile, the acquisition of genuine competitors allowed them both to expand into emerging market segments. Seagate Technology, for instance, acquired Conner Peripherals in 1996, Maxtor in 2006, and Samsung's hard drive business in 2011. Western Digital acquired Read-Rite Corporation (2003), Komag (2007), Hitachi Global Technologies in (2011), and Virident Systems (2013).

That's how the two companies managed to amass a near 87 percent of the market, with combined revenues of $30 billion dollars; and to expand into storage industries like flash memory, an emerging market segment of the disk drive industry.

List of Acquisitions

Company

Acquisitions

Western Digital

Read-Rite Corporation (2003), Komag (2007), SiliconSystems (2009), Hitachi Global Technologies (2011), Virident Systems (2013), BeloBit (2013).

Seagate Technology

Conner Peripherals (1996), Maxtor (2006), EVault (2007), Samsung's hard drive business (2011), LaCie (2012).

Click to enlarge

Source: Corporate reports

Market Shares for HD

Company

Market Share (%)

Western Digital

45

Seagate

42

Toshiba

13

Click to enlarge

Source: Backupworks.com

Seagate's And Western Digital's Financials

Company

Forward PE

Operating Margin (%)

Revenue (NYSE:TTM)

Revenue per share

Western Digital

7.72

13.58

15.35B

63.70

Seagate Technology

7.01

14.56

14.35B

38.79

Click to enlarge

Source: Finance.yahoo.com

The second strategy employed by both Seagate and Western Digital was forging collaboration with customers and competitors for the promotion of storage products. In 2008, for instance, Seagate forged a collaboration agreement with HarmanBecker for Automotive Media Server Applications Using D.A.V.E.(NYSE:TM) Technology. In 2012, Seagate announced a cloud storage business alliance to target engineering and marketing at cloud. In 2013, Western Digital forged a collaboration agreement with SanDisk to develop hybrid disk drives, known as SSHDs-a fast-moving market. In the same year, Seagate, HGST, Toshiba and Western Digital team up to form The Storage Products Association (NYSE:SPA) to promote hard drive technology.

Which stock is a better bet for the future?

It is hard to decide, as the two companies display similar financials and market shares. Nonetheless, I would bet on Western Digital, as it is better positioned to benefit from the fast-growing flash memory disk market.

A few words of caution: Winning through acquisitions and collaborations has its own limits. Acquisitions may become increasing expensive, while collaborations may turn sour. That's why I would be very careful in investing in the two stocks, especially after the strong run up in the last twelve months.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.