Seagate's Growth Rides These Storage Business Trends

| About: Seagate Technology (STX)

Seagate Technology PLC (NASDAQ:STX) is a leading provider of electronic data storage products such as hard disk drives for personal storage and enterprise applications. Its main products are hard disk drives or HDDs. Seagate manufactures electronic data storage products, addressing a broad spectrum of clients such as enterprise applications, client compute applications and client non-compute applications.

In an earlier note title A Snapshot Of Seagate's Key Businesses And $33 Price Estimate we gave a snapshot of the company's main businesses. Below we look at some of the key drivers to Seagate's business as well as trends supporting the growth of the storage business.

Growth In High Definition Digital Content Drives Storage Requirement

The high growth of digital content is driving the need for high capacity storage to aggregate, host, distribute, manage, backup and use digital content. The need to access rich data and content is being driven by a highly mobile and increasingly connected user base. The traditional enterprise and client compute markets will continue to demand high capacity storage solutions and will be best served by hard disk drives, where manufacturers compete on the ability to deliver cost effective, reliable and energy efficient mass storage devices. The increasing demand for HD content for media consumption and rich formats such as HD DVD and Blu-Ray, drives the demand for high capacity disk drives solutions in the end-user market.

According to Cisco (NASDAQ:CSCO), the global cloud traffic will grow at an annual rate of 45% and reach 4.3 zetabytes by 2016, while global data center traffic will grow to 6.6 zetabytes. Nearly 20% of this data will be solely due to online video streaming, email and music. Seagate is leveraging this end-user content creating phenomenon with value add products focusing on consumers such as DVR backups and wireless backup networks as well as media storage devices designed to connect easily with different media sources such as TV's, radios and gaming consoles.

Pricing Trends

In early October 2011, flooding in Bangkok, Thailand, caused many manufacturing industrial parks to shut down operations. Factories supporting the HDD industry's supply chain were concentrated within these industrial parks to reduce costs and improve logistics, and during this temporary suspension of operations, demand exceeded supply, leading to high prices in HDD's. This led to higher prices for the industry's average selling price per unit. Seagate's ASP for hard disks, surged from $55 in the third quarter to $68 in the fourth quarter of 2011. The industry has recovered since the flooding, and we believe that the prices will stabilize and then begin to fall as operations ramp up again. According to leading market research firm iSuppli, this is the primary reason for Seagate's leading position in the HDD market in the recent quarters, as it was the least affected.

Shift From Hard Disk Drives To Solid State Drives

All leading laptop manufacturers are now offering laptops with a hybrid HDD-SSD primary memory and high-end high-performance laptops with complete SSD memory. Solid state drives are much more expensive per GB, and this is the primary reason for the slow adoption of SSD as the primary memory component. As production capacity increases and technology changes leads to a drop in SSD prices, we can expect that solid state drives will become a standard for notebooks and netbooks. These drives are unlikely to find extensive use in desktops in the near future.

Seagate was late to adapt to this trend and has been making investments into companies such as LaCie and DensBits to acquire know-how in the SSD and USB flash storage market. We currently estimate its market share to be in the low single digit figures, but the company has sales clout and production facilities to quickly gain market share.

Rise Of The Tablet Computer

All tablet computers use solid state memory chips as their primary storage memory, and we estimate that tablet sales will outstrip notebook and netbook sales by the end of our forecast period. HDD memory is relatively unresponsive, slow and bulky and will not find application in tablet computers. The increasing popularity of tablet computers is the primary reason for growth in the SSD space. We estimate that tablet computer sales will outstrip that of laptop sales by the end of our forecast period and this is a major trend shaping the storage industry.

Growth In Cloud Computing And Remote Storage Services

We expect Seagate's enterprise business to be driven by businesses deploying cloud computing environments in an effort to pool resources and cut costs. Remote storage is becoming a standard for most enterprises and has even gained traction with retail customers with services like iCloud, Dropbox, Skydrive and Google Drive. To achieve the high performance needed with cloud computing, we can expect the hybrid SSD-HDD enterprise storage drives to become popular in the future.

We currently have a $33 Trefis Price Estimate for Seagate, which is in-line with its current market price.

Disclosure: No positions

About this article:

Tagged: , Data Storage Devices
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here