Seagate, Western Digital Ready For 'Hybrid' Data

By
A A A

As cloud data use grows in 2014, companies likeSeagate Technolgy ( STX ),Western Digital ( WDC ) andEMC ( EMC ) will be vying for the best spots in the new "hybrid" data-storage environment.

This promises to be the year that data storage has it both ways -- as more storage buyers choose to outfit their companies with packages including both cloud and traditional storage, say industry observers and insiders.

Mainstream storage buyers have grown confident enough to try cloud-based storage, but not confident enough to go all in, says Dmitry Kagansky, vice president at Ave Point, an enterprise data management company.

"Organizations will continue struggling with this issue," Kagansky said, "but I think 2014 is (when)organizations will accept that the hybrid approach is the best option for business today ... a balance between convenience and control."

Hard Drive Vs. Flash Drive

Western Digital and Seagate mostly make hard drives for consumers and enterprise customers. Most individual consumers use hard drives -- internal components that employ a spinning metal disk -- as the primary storage on their laptops or home computers. The new "flash" or solid-state drives, SSDs, perform basically the same function, but are made from chips and circuitry using no moving parts. SSDs are smaller and more portable -- witness the so-called thumb drive -- reasons for SSDs' growing popularity and use in tablets and smartphones.

SSDs are said to be a bit quicker than traditional hard drives, but they're also a newer technology with a higher cost.

Buyers ofApple 's ( AAPL ) iMac desktops have the option to configure their computers with SSD storage instead of a traditional hard drive. Putting 512 gigabytes of flash storage now costs buyers $500 more than the same computer configured with a 1 terabyte HDD.

On the level of corporate customers, where hybrid cloud storage is taking hold, network servers have begun adopting designs blending SSD and HDD technologies into hybrid flash arrays. Names likeNimble Storage ( NMBL ),Fusion-io (FIO) and privately held Tintri and Tegile are players in this territory.

EMC is a leader in managing customer data, selling virtual infrastructure software ranging from information security to data archiving. Most of its customers are IT departments.

NetApp (NTAP), a network storage systems maker, sells on-site storage for corporate data centers, along with cloud data centers.

Consolidation And New Arrivals

To survive these increasingly complex iterations of the data storage story, hard-drive makers have consolidated as they struggle to keep costs down and margins growing. Hard drives have high manufacturing costs and complex designs, says Brian Cox, senior director of outbound marketing forSanDisk (SNDK), which makes competing solid-state drives.

"We have seen the shakeout in the hard-drive industry," he told IBD, "from over 100 suppliers to down to just three today."

The consolidation is seen continuing. Seagate in December announced it would pay $372 million in cash forXyratex (XRTX), which is its largest equipment-testing partner.

"We see this acquisition as very opportunistic for STX, as it allows the company to vertically integrate its manufacturing process even further," wrote Brean Capital analyst Ananda Baruah, who rates Seagate stock a buy with a price target set at 70.

The acquisition shows Seagate wanting to be a key supplier to cloud storage providers, Piper Jaffray analyst Andrew Nowinski wrote at the time .

Despite the challenges, investors have been driving the stocks higher. Seagate stock gained 89% last year and has added 8% so far this month. Western Digital jumped 103% for 2013 and another 4% in January.

Those gains, aided by Nimble's 114% romp since its December IPO, helped hoist the Computer-Data Storage group to a No. 24 rank among IBD's 197 industries, up from a No. 173 ranking at the start of December.

Most Wall Street analysts remain optimistic about the future for traditional data storage companies. Sixteen of 25 analysts polled by Thomson Reuters rate Western Digital a buy. And 35 of 44 analysts rate EMC a buy. The majority of analysts polled by Thomson Reuters have a hold rating on Seagate.

Is The SSD Threat Moderating?

The rise of SSDs presents a growing challenge for the data storage industry in 2014. Consumers are increasingly being lured by computers with flash drives vs. the older hard-disk drive formats, says RBC Capital Markets analysts Amit Daryanani.

"SSDs present a threat to the traditional HDD market," Daryanani wrote in a recent research report, "as large adoption of flash could hurt disk drive sales."

In spite of that threat, Daryanani earlier this month boosted RBC's price target for both Seagate and Western Digital.

The shift toward flash-based SSD storage might already be moderating, according to JPMorgan analyst Mark Moskowitz, who in December upgraded Western Digital stock to overweight, or buy.

"Our research also indicates the rate of change away from HDDs to flash-based storage in PCs, servers, and storage is not accelerating as previously feared," wrote Moskowitz in a research report.

The SSD industry will be shipping some 72,000 petabytes of SSDs by 2017, up from about 5,800 petabytes in 2012, according to Gartner data. A petabyte is a billion gigabytes.

That is a small fraction of the hard-drive market, which ships some 500,000 petabytes of HDD drives each year, according to Moskowitz.

The market for external storage devices and services also has suffered as more businesses and consumers move to cloud storage. This includes the cheap -- or free -- storage offered by startups like Dropbox, a company that in mid-January raised $250 million in new funding, giving it a potential market value of about $10 billion, according to the Wall Street Journal.

2 Gigabytes For Free

Dropbox is a cloud storage service that offers users up to 2 gigabytes of space for free. Businesses can put their data in the cloud via DropBox for about $15 per month per employee. The global external-storage market, made up mostly of disk-based data storage, is led by EMC and NetApp. It's likely that that market contracted about 2% in Q4 from the year-earlier period, wrote Barclays Equity Research analyst Ben Reitzes. Revenue fell 3.5% in Q3, according to research firm IDC.

But the U.S. should show stronger sales than some other regions, according to a poll of retailers Reitzes' team undertook in December.

"We still believe EMC and NetApp should ... perform better than the storage market," wrote Reitzes.

Growth in data storage spending in the long term should outpace general enterprise IT spending, which is good news for firms like NetApp, wrote Morningstar Equity Research analyst Grady Burkett in a recent report.

Network-storage gear maker NetApp is "well-positioned to capitalize on this growth," says Burkett.

NetApp shares have surged 11% in January, hitting highs it hasn't seen since April 2012.

"Our research indicates key partners are doing better than expected," wrote Lake Street Capital Markets analyst Eric Martinuzzi, who rates the stock a buy, "and there has been good follow-through into the new year."

For now, traditional on-site storage for both consumers and enterprise customers still offers a much quicker read/write time than its cloud competitors, says Codero Hosting CEO Emil Sayegh.

Startups like Box and Dropbox, along with tech giants likeGoogle (GOOG) andAmazon.com (AMZN), are beefing up their offerings in an attempt to attract consumers.

"Will 2014 be the year that cloud storage takes over traditional storage?" Sayegh asked in an email. "Probably not yet."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: AAPL , EMC , NMBL , STX , WDC

Investor's Business Daily

Investor's Business Daily

More from Investor's Business Daily:

Related Videos

Stocks

Referenced

Most Active by Volume

112,131,130
  • $74.98 ▲ 5.18%
57,963,905
  • $8.32 ▲ 8.33%
48,392,602
  • $3.45 ▼ 0.29%
45,276,527
  • $36.17 ▲ 4.21%
44,800,927
  • $17.84 ▲ 0.34%
44,539,649
  • $97.03 ▼ 0.16%
44,078,180
  • $15.62 ▲ 0.64%
43,461,551
  • $35.50 ▼ 1.06%
As of 7/24/2014, 04:04 PM