Sunil Shah's  Instablog

Sunil Shah
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A fund manager who cut his cloth in Schroders London. He joined Coronation South Africa in 1998, running the Smaller Companies Fund which had the best 5-yr record in the sector during his tenure. In 2005 he left Coronation to pursue his passion in writing (and invest without constraints). He... More
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  • Hard Disk Drives: The Bedrock of the Information Highway 0 comments
    Jan 26, 2012 8:07 AM | about stocks: WDC, STX, AAPL, INTC

    HDD's are the bedrock of the digital highway. Whatever iphone or photo taken on whatever device, it ends up being stored on a Hard Disk Drive as the preferred cost efficient medium of the digital highway. Pure and Simple.

    There's been an unfortunate natural disaster. 60% of world capacity wiped out in Thai floods. Unfortunate as it was, this had drawn financial minds to the importance of HDD's. A complex substrate, a precision magnetic storage element, a disk spinning at 7200 revs per minute, these are the elements, the skill, the R&D, required to make that storage space that we all take, oh so for granted.

    So after the floods we have to rebuild capacity. We realise the costs. We see the shortage. We see prices rising by 100% even 200% at the retail level. So what do we do as HDD suppliers?

    We realise that the complexity and importance of our product has been grossly underappreciated. We realise that if the ASP was 45$ before the floods we can now get $75. Why? Because there aint no alternative.

    So we finally have gained world acknowledgement for what we do, the brains and sweat and machines that go into making that Hard Drive. And we are grateful that it is finally acknowledged.

    And we make damn sure the intrinsic price of that drive stays above 65$ into perpetuity.

    This is a once-in-a-lifetime-opportunity for the industry to earn respectable gross margins. The time to stake your rightful claim to a decent return on capital, return on sweat, return on brains. Heard of Apple or Intel? They have, and their operating margins stay above 40 even 50%.

    Western Digital you made 32% this quarter. If you don't ensure it stays above 30% for perpetuity, given the consolidation in the supplier space, given the fundamental supply/demand imbalance in the future….if you don't, then you deserve to slog and slave for nuthin' for the rest of your days.

    disclosure long WDC

    Disclosure: I am long WDC.

    Stocks: WDC, STX, AAPL, INTC
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