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Seagate (STX -3.6%) and Western Digital (WDC -1.8%) slump after Jim Chanos calls the hard drive...

Seagate (STX -3.6%) and Western Digital (WDC -1.8%) slump after Jim Chanos calls the hard drive makers value traps at the Sohn conference. Chanos, who was bearish on Dell before the bottom fell out of its PC business, calls the hard drive industry "PC with a year lag." "Most people have way too much storage as it is on their laptops and desktops," he adds. Seagate is Chanos' favorite short - he cites margin pressure, accounting issues (Chanos thinks $1B of goodwill from the Samsung deal could mask cash flow issues), and insider selling.
Comments (15)
  • jumpnjoey77
    , contributor
    Comments (718) | Send Message
     
    Thank you. I was able to pick up more STX.
    9 May 2013, 10:09 AM Reply Like
  • wallst00
    , contributor
    Comments (5) | Send Message
     
    what Mr. Chanos fails to recognize is that these companies are expanding on their storage business away from just PCs. We all need more back up to save all the high capacity pictures and videos we are taking.
    9 May 2013, 10:19 AM Reply Like
  • imnotspecial
    , contributor
    Comment (1) | Send Message
     
    Surprise, surprise! He is short on the stock.
    9 May 2013, 10:31 AM Reply Like
  • Nate Sterling
    , contributor
    Comments (538) | Send Message
     
    Mr. Chanos is just one person with an opinion, and his opinion happens to be dead wrong, as the growth in big data will continue apace and a large portion of revenues for STX and WDC has shifted away from PCs into the cloud and other devices, and hybrid drives incorporating the best technology of both HDDs and SSDs are the wave of the future, plus STX and WDC are in a leadership position and basically have a duopoly and have the resources to shift into SSDs as the time comes. I continue to be surprised at how much one analyst's opinion moves Mr. Market, but I would consider this a buying opportunity as shares go on sale for STX and WDC.
    9 May 2013, 10:37 AM Reply Like
  • Ashraf Eassa
    , contributor
    Comments (9231) | Send Message
     
    There's nothing wrong with having an opinion and taking action. You guys act like short sellers are evil...

     

    That being said, I do not agree with him :)
    9 May 2013, 10:48 AM Reply Like
  • WallStreetDebunker
    , contributor
    Comments (2865) | Send Message
     
    "The PC is dead! Bricks and mortar stores are dead! Short, short, short!"

     

    Geesh. What an embarrassment these useless hedge fund managers have become at their speculation circle jerks.
    9 May 2013, 10:50 AM Reply Like
  • jd7
    , contributor
    Comments (42) | Send Message
     
    I'm torn on this one. I respect Chanos, but I'm not sure that the hard drive market will crash faster than STX can increase their SSD offerings, and I'm not sure if it will "crash" at all. Humanity generates an inconceivably vast amount of data every year, and SSDs aren't priced effectively to store it all. He could be right about their accounting problems, but I'm not sure if he's forecasting the data storage market correctly.
    9 May 2013, 10:52 AM Reply Like
  • kingmob
    , contributor
    Comments (56) | Send Message
     
    While being open to new and exciting opinions on stocks I own I simply can't see Chanos being right. How is HDDs lagging 1 year behind PCs? Just-in-time production which all major PC manufactures use do not allow for large inventories of parts. This includes HDDs so why any slump in PC sales should within a short span of time translate to a slowdown in the demand of HDDs as well if his thesis is correct. The Q1 reports for STX and WD shows otherwise however.

     

    Furthermore as mentioned many times by others, the need for storage doesn't go away just because people move to tablets, phablets and phones. It just moves storage to the cloud and big data centers instead of local storage, but storage is still very much needed. Sure big data centers may utilize their capacity somewhat better but one could speculate that is being offset by the massive amounts of new data being generated by all the new mobile devices that take pictures, tweet, message and file exchange. I would love to get more tangible info on this.

     

    I would like to know more about the reasons behind Chanos very short statements. Especially because David Einhorn has a very large position in both Seagate and Western Digital. Personally I have more faith in Einhorn - but I'm biased as I have a position in STX.
    9 May 2013, 11:03 AM Reply Like
  • WallStreetDebunker
    , contributor
    Comments (2865) | Send Message
     
    SSD technology has plenty of drawbacks, as do tablets. That Chanos thinks PCs and magnetic drives are going obsolete any time soon tells me that he might have a superficial understanding of the technology and perhaps is putting too much faith in industry speculations from overpaid futurist consultants in Siliconman Valley.
    9 May 2013, 11:04 AM Reply Like
  • twhite113
    , contributor
    Comments (423) | Send Message
     
    Duopoly - divi yld - massive buyback - retiring debt - forecast for higher TAM and improving pricing in 2H13 - ~7X forward EPS. Chanos is wrong, and he probably knows it, but needs to drive down price to cover his underwater short, or he is simply unable to grasp what is actually going on.
    9 May 2013, 11:09 AM Reply Like
  • Tollsforthee
    , contributor
    Comments (409) | Send Message
     
    I was at Best Buy recently to buy a new hard drive. They were nearly out-of-stock on both WD and STX hard drives.

     

    Plus, STX just announced a full suite of SSD drives and products yesterday, although it was drowned out by the Chanos announcement.

     

    Full disclosure: long STX in size.
    9 May 2013, 11:28 AM Reply Like
  • Whitehawk
    , contributor
    Comments (3129) | Send Message
     
    WDC and STX thrive because there is no economically viable substitute yet for mechanical HDs that have engineered obsolescence.
    9 May 2013, 12:20 PM Reply Like
  • TwistTie
    , contributor
    Comments (2476) | Send Message
     
    I like and own STX but came to the conclusion last week that it was over-extended, so I sold calls.

     

    Mr. Chanos might help them pay off for me.

     

    In the long term, it seems like the cloud will need more and more storage just to handle my stupid comments.
    9 May 2013, 12:42 PM Reply Like
  • Adib Motiwala
    , contributor
    Comments (250) | Send Message
     
    It is an interesting call. I attended his presentation live yesterday.

     

    His thesis was
    - margins are unsustainable. They will come off significantly. Toshiba announced they expect gross margins to halve. So, Chanos thinks same will happen to the other two.
    - as ASPs have risen, Hard drives now make up 10% of the cost of PCs. PC makers are operating on razor thin margins and will push back on the prices for hard drives.
    - Volumes will slow down as PC volumes come off.
    - Storage needs on cloud won't be as drastic as suggested by bulls.
    - Insiders at STX have been selling.

     

    I have been long WDC for about 2 years now. I bought in the low $30's. I picked WDC over STX due to the better operating efficiency and 10 year track record of WDC.

     

    I think it is dangerous to short companies with strong net cash balance sheets, producing solid free cash flow, trading at low valuations (5x-6x FCF), paying dividends and buying back shares (50-90% of cash flow), duopoly industry. Their capital allocation is not like that of Dell or HPQ. HPQ also had not such a great balance sheet.

     

    WDC spends a lot of money on R&D and comes out with new products such as hybrid drives and also has enterprise SSD products. They just partnered with SanDisk for a product.
    9 May 2013, 02:50 PM Reply Like
  • twhite113
    , contributor
    Comments (423) | Send Message
     
    point by point my refutation to Chanos would be
    - I don't know what Toshiba, or what he says about Toshiba, is seeing in margins, but a week ago STX was saying they anticipate HIGHER ASP's and greater TAM in 2H13.
    - PC makers will settle into a consumer staple industry and will have predictable pricing in the near future.
    - total storage demand is what matters of course, not PC volumes and HDD's as well as hybrids and SSD's and cutting edge technology (read the new article about STX's HARM) will continue to facilitate that ever-growing demand.
    - Insiders have been selling STX stock for years, right? Yet we are at all time highs. That smacks of absolute desperation...and has taken Chanos down a peg in reputation.

     

    But the main thing is (as you point out) the FCF that allows for massive shareholder returns and a P/E (TTM and forecast) ratio that is still among the lowest for all computer hardware makers...so, where is the juice for a short? Other than volatility the shorts have a terrible risk/reward here.
    9 May 2013, 08:35 PM Reply Like
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