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Since the 1960s, hard disk drives (HDDs) have been the dominant form of storage for computers. Over the last few years, solid state drives (SSDs) have begun to emerge as a viable alternative, promising greater stability, superior performance, and better power usage. As a result of this, the SSD industry has seen major growth. Intel (NASDAQ:INTC) has specified usage of flash storage as part of its Ultrabook standard, Apple (NASDAQ:AAPL) already uses SSDs exclusively in its Macbook Air product line and is likely to make them standard in the next model of Macbook Pros, and companies like OCZ Technology (NASDAQ:OCZ), which have traditionally had no role in desktop or laptop storage, have released SSD products of their own.

While the industry has a great deal of potential for rapid growth, investors should also be cautious. Starting in the late 1990s manufacturers of RAM found it increasingly difficult to differentiate their products. This forced companies to compete solely on the basis of price, reducing margins to nearly nothing. SSD manufactures that lack the ability to differentiate their products will face the same long term result. For that reason, I have identified three companies that have unique advantages within the industry.

  1. LSI Corporation (NASDAQ:LSI): An SSD contains two essential components: the flash memory chips that store data, and the drive controller which handles access to them. LSI owns Sandforce, which owns the Sandforce drive controller. This drive controller is licensed by a majority of SSD manufactures, including Intel, Corsair, Kingston, and Patriot. This wide market adoption provides the company with both a sustainable competitive advantage and a buffer against market fluctuations. Intellectual property and technical knowledge can serve as powerful barriers to entry for competitors, and LSI possesses both. Additionally, because they sell controllers instead of drives directly, they are less impacted by the volatility of the storage market.
  2. OCZ Technology (OCZ) purchased Indilinix in March 2011, a competitor of Sandforce. This makes OCZ unique from its competitors in that it can release SSDs containing a different controller - most recently, the Vertex 4. This allows the company to differentiate on the basis of performance, and charge a corresponding price premium. Companies of need to obtain market power (in the economic sense) to avoid the trap of direct price competition. OCZ is relatively well position to do this. A well established brand name among computing enthusiast resulting from product lines in other computer components is also valuable.
  3. Intel has an unmatched advantage in that the company can potentially vertically integrate its entire supply line. Although top end Intel SSDs currently use Sandforce controllers, Intel has produced its own controllers in the past and could do so again if needed. Additionally, Intel has fabrication facilities for its own flash memory chips, and has consistently led the industry in reaching new manufacturing processes. A smaller manufacturing process allows for more flash chips to be produced on a single die, which can substantially reduce manufacturing costs. As a result Intel can compete on price or quality, and can reorient its product line more quickly than competitors. Having on the most valuable brand names in computer hardware is unlikely to hurt.

The fast growing SSD industry offers the potential for major gains. But investors must be cautious to avoid unsustainable business models, and look for companies that can maintain real long term growth. LSI Corporation, OCZ Technology, and Intel have this potential.

Source: 3 Ways To Profit From The Solid State Drive Explosion