Imagine a Formula One race with two cars lapping the rest of
the field, but unable to put much distance between each
That's similar to the competition among companies selling
Two players,Seagate Technology (
) andWestern Digital (
), dominate the field, with a combined market share estimated at
80% to 85%. They make hard-disk drives, or HDDs, for desktop and
notebook computers, enterprise applications and consumer
The two have spent the last year and a half battling back and
forth for the top spot, while most of the other players have
fallen by the wayside.
According to market researcher IHS iSuppli, Western Digital
retook the lead from Seagate in worldwide HDD shipments during
the June 2012 quarter. Western Digital continues to hold a slight
edge, shipping 59.2 million hard drives during the December
quarter vs. 58 million for Seagate.
Seagate had moved into the top spot in 2011 after flooding in
Thailand hurt production at Western Digital's factory there.
Seagate, which also has a plant in Thailand, fared better because
its facility is located on higher ground than Western
Although Western Digital has retaken control of the overall
HDD market, Seagate still holds a lead in the higher-margin
enterprise market, which caters to businesses.
But that landscape, too, appears set to change.
"While Seagate had a 48% share of the enterprise market last
year, the introduction by Western Digital of its new helium (HDD)
technology could catapult the manufacturer to the top at the end
of 2013, dethroning Seagate in the process," IHS analyst Fang
Zhang noted in a Feb. 6 report. Sealed drives filled with helium
promise greater capacity and lower power consumption.
The HDD business used to have a handful of players. But that
changed over the past 14 months after Seagate bought Samsung's
HDD business for $1.4 billion and Western Digital acquired
Hitachi's HDD business for about $4 billion.
The only other significant player of note, Toshiba, has about
10% of the global HDD market, says Jayson Noland, an analyst at
Baird Equity Research.
With the playing field now dominated by two companies -- and
with fewer competitors involved in a price war for business --
analysts expect to see prices move in a positive direction for
Seagate and Western Digital.
"Given that just three manufacturers supply the world's total
HDD demand, we believe recent industry consolidation may lead to
a more rational pricing environment as Seagate and Western
Digital both have more to lose than gain from aggressive
pricing," Noland noted.
Last year, both Western Digital and Seagate updated long-term
gross margin target ranges well above historical norms, he says.
However, the companies will do battle in a slightly shrinking
market as desktop and notebook computers continue to lose share
to tablets, smartphones and solid-state drives (SSDs).
Fang estimates global HDD market revenue will fall to $32.6
billion this year from $36.7 billion last year. He expects HDD
revenue to be flat for the next few years, with 2016 revenue of
From Servers To GPS Devices
Hard-disk drive makers provide a number of different products
with different applications and end markets.
Seagate's gear is used in everything from enterprise servers
and mainframes to desktop and notebook computers, gaming consoles
and digital media systems. The company also provides data storage
services. Its main customers are original equipment
manufacturers, distributors and retailers.
Western Digital mainly offers 3.5-inch and 2.5-inch hard
drives used for performance enterprise and capacity enterprise,
as well as solid-state drives for embedded applications. It also
sells drives used in consumer electronics, entertainment and
navigation systems, as well as external storage appliances. It
sells the gear to computer manufacturers, resellers, retailers
and other firms.
Both companies operate on a June-ended fiscal year. Both have
also seen their financial fortunes improve over the last several
quarters after watching sales and earnings decline in fiscal
During its fiscal second quarter, which ended in December,
Seagate posted earnings of $1.38 a share, excluding special
items. That was up 5% from the prior year and a nickel above Wall
Street's forecasts. Revenue rose 15% to $3.67 billion, topping
estimates for the first time in two quarters. It was Seagate's
fifth straight quarter of double-digit percentage growth in
However, Seagate shares fell hard on a weaker-than-expected Q3
"Weak demand continues to be an albatross, although it's clear
that constructive structural trends continue," Edward Parker, an
analyst at Lazard Capital Markets, noted in a report on
Western Digital reported fiscal Q2 earnings of $2.09 a share,
excluding special items. That was up 38% from the prior year and
well above estimates for $1.82 a share. Sales nearly doubled to
$3.8 billion, also topping views. It was Western Digital's fourth
straight quarter of double-digit sales growth. Western Digital
forecast fiscal Q3 revenue in line with consensus.
"We think Western Digital has the better relative upside
potential due to market share gain potential and cost takeout
opportunities," noted JPMorgan analyst Mark Moskowitz, who has a
neutral rating on Western Digital.
Both companies have gotten a good reception on Wall Street
lately. Seagate's stock price hit a 10-year high of 37.94 on Jan.
23. Western Digital's stock reached a 15-1/2-year high of 49.50
on Jan. 28.
They are the two highest-rated stocks in IBD's Computer-Data
Storage industry group, which overall has a weak ranking out of
197 groups, as well as many members with poor ratings. The other
group members include data warehousing providerTeradata (
) and 2011 IPOFusion-io (
), which has pioneered a new form of storage.
Reliant On Asia, HP And Dell
Western Digital and Seagate are both global companies that
draw more than half of their sales from the Asia-Pacific region,
mainly selling to OEMs there.
In fiscal year 2012, which ended in June, Western Digital got
58% of its revenue from Asia-Pacific, 23% from the Americas, and
19% from Europe, the Middle East and Africa. No one client
accounted for more than 10% of sales.
Seagate drew 55% of its revenue from Asia-Pacific in fiscal
2012, 26% from the Americas and 19% from EMEA. Key clients
), with 15% of revenue andHewlett-Packard (HPQ), with 13%.
The global market size for HDDs is expected to be in the $32
billion range for the next few years, according to IHS estimates.
In terms of units, Western Digital sees a total addressable
market of 275 million units industrywide for the first half of
calendar year 2013.
"Management expects increased demand in the second half of
calendar year 2013 given lean inventory levels, an improving
economy, and more innovation in the PC market," analyst Noland
Profit Declines Expected
Most industry watchers see flat to declining HDD sales this
year, partly offset by price increases. As always, a lot depends
on how economies in key markets perform.
"If end demand conditions improve, then the stage could be set
for upward revisions to HDD estimates," JPMorgan's Moskowitz
noted. "The key hurdle will be whether one or more HDD vendors
elect to make a market share grab, disrupting pricing
Neither Seagate nor Western Digital is likely to see much
profit growth in coming years as the companies bump up against a
flat-lining market and tougher year-over-year comparisons.
Analysts polled by Thomson Reuters expect Seagate to post a
23% decline in EPS this fiscal year. The company's earnings are
seen rising 6% in fiscal 2014 and remaining flat the following
Analysts expect Western Digital to post EPS declines of 7%
this fiscal year, 1% in fiscal 2014 and 7% in fiscal 2015.
Those consensus projections notwithstanding, some industry
watchers still see positive trends.
"Despite ongoing signs of weakening demand and the receding of
peak margins, we believe consolidation and the aftermath of the
floods have changed the pricing dynamics of the industry," Parker
noted. "We see this ultimately leading to higher and more
consistent levels of profitability, driving multiple expansion
for both stocks."