Seagate Is Well Positioned For A Solid State World

| About: Seagate Technology (STX)
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It's no secret that solid state drives are poised to be the dominant storage technology going forward. Compared with traditional hard disk drives, solid state drives offer lower latency and access times, are less vulnerable to physical shock, consume less power, and are silent. The primary disadvantage is that the cost per gigabyte for solid state storage is significantly less attractive. To illustrate, for the price of a 512GB solid state drive (roughly $360 for the least expensive model on Amazon (NASDAQ:AMZN) at time of writing), one could instead purchase three 2TB 7200 RPM hard disk drives.

While I expect the prices of solid state drives to drift down as NAND flash prices steadily drop, the reality is that at least in the near to medium term, hard disk drives as well as flash technology will co-exist to serve the broad needs of the market.

Seagate (NASDAQ:STX), one of the two major players in the hard disk drive realm, is a strong company today, exhibiting stellar sales and earnings from the traditional hard disk drive business (for a more in-depth view on this, I recommend Skyler Greene's "Seagate Earnings Strong, Stock Has 80% Upside").

Unfortunately, concerns over the future of hard disk drives in the face of solid state technology are very likely the reason for the incredibly low price-to-earnings of 4.94 as of last close. I believe, however, that Seagate's management team has positioned the company to be able to transition to solid state drive technology for the following reasons:

1. The Samsung Partnership

By far, the most expensive part of a solid state drive is the NAND flash, so the ability to procure NAND at good prices is imperative to success in the field. To this end, Seagate partnered with Samsung, a leading manufacturer of NAND flash, to ensure a supply of NAND flash for pure solid state drives and hybrid drives going forward. Seagate's size and purchasing scale will allow it to produce cost-competitive products with good margins going forward.

At the most recent conference call, it was noted that the technology partnership with Samsung was proving fruitful and that test products of the "highly competitive tier 0 product" would be shipping to customers at the end of the current quarter.

2. The DensBits Stake

The next piece of the solid state puzzle is the controller technology. Seagate recently took an equity stake in the company DensBits. In the most recent conference call, it was noted that the company is developing solid state drive controller technology with DensBits, indicating the company's continued commitment to position itself well in the flash space going forward.

3. Openness To Further Acquisitions

While it is clear that Seagate's cash and partnerships will allow it to prosper in the flash storage market going forward, the company is keenly aware that it needs not to simply be "competitive," but it needs to eventually dominate in a space with a number of highly competitive players including Violin Memory, SanDisk (SNDK), Fusion-IO (NYSE:FIO), STEC (NASDAQ:STEC), OCZ Technology Group (NASDAQ:OCZ), and a slew of others. I expect Seagate to use its enormous profitability to further build its moat going forward and acquire companies and technologies that will strengthen its competitive position.


In short, the company's future prospects are excellent, and despite the apparent resistance to flash storage technologies that the company has exhibited in the past, it is clear that management is well positioned for the future of storage. Coupled with a healthy, growing dividend, and a rock solid balance sheet, it's hard to not recommend initiating (or adding to) a position in Seagate.

Disclosure: I am long OCZ.

Additional disclosure: I may initiate a long position in STX within the next 24 hours.