By Tim Plaehn
Recently, enterprise level computer data storage and storage array venders including NetApp (NASDAQ:NTAP), EMC Corporation (EMC) and Hewlett Packard (NYSE:HPQ) have sent out notices to their customers, stating prices for hard drives in the storage arrays sold by these companies will be increase from 5 percent to 20 percent. Unfortunately, these price hikes are not an indication of future higher profits for these companies, but are an indication of a serious supply-chain disruption.
A multi-month flooding situation in Thailand has affected numerous industrial parks where up to half of the world's production of high capacity hard drives is located and one-quarter of all hard drives is produced worldwide. The floods have been described as the worst in 50 years for Thailand. Flood conditions started in July 2011 and by late December many areas were still under flood conditions. The Thai hard drive factories are primarily owned by Japanese companies who sell the drives as basic components to the companies selling large-array storage systems like NetApp.
The notifications to customers from Hewlett Packard, EMC and NetApp all cover the same territory. Each company announced it had maintained previous pricing in the face of a global shortage of hard drives and rising prices. Due to the lack of visibility as to when normal supplies and pricing would return, the companies were announcing price hikes starting the first of 2012 – or in the case of NetApp – on February 6.
The effects of the hard drive shortage will be more profound on companies in the tech sector than will be the pricing issues. For the fourth quarter, companies with high exposure to rising prices, which were not passed along, will see a reduction in net income. NetApp already announced revenue and earnings guidance levels in November below the expectations of Wall Street analysts.
It is hard to predict the effects of the hard drive shortage on an individual, company-by-company basis. For example, as one of the world's largest computer manufacturers, Hewlett Packard believes it has enough clout with the hard drive manufacturers to obtain an adequate supply of drives, even if they are at a higher price. Hewlett Packard has indicated it expects the shortage in hard drives to persist well into the 2012 second quarter.
One computer industry forecast has the number of personal computer – PC – shipments to decline by up to 20 percent in the 2012 first quarter due to the components shortage. The decline will effect different companies differently, so investors should keep a close eye on the news releases from their tech company holdings. Companies producing hard drives such as Seagate Technology (NASDAQ:STX) and Western Digital (NYSE:WDC) will be the first to show the effects of the Thailand floods. Next will be the storage array companies, which are facing a squeeze in hard-drive supply. Computer manufacturers will also feel the shortage if PC-sized drives remain in short supply.
Companies across the tech sector may report lower or flat earnings for the first and second quarters of 2012. The situation concerning the resumption of normal production rates of hard drives is still not certain. For those companies that work on a small profit margin, not getting drives, paying more for the drives they receive and not being able to ship enough product could lead to some negative earnings reports. Investors with an eye on stocks in this sector should think twice about buying any shares before reading the results of the next two earnings reports. That said, the hard-drive shortage will not last forever, so some of these stocks may present buying opportunities for the long-term investor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.