When old technology meets new technology, the tectonic plates create an earthquake before one prevails over the other. Right now, “old” technology names look like old school value plays on Wall Street.
One of the best values, at least on the surface, is in the hard-drive business.
Hard Drive Manufacturers
There are only two players in traditional hard drive technology: Western Digital (WDC) and Seagate Technology Plc (STX). Both trade at a relative discount based on their trailing price-to-earnings ratios. WDC sells for 6.8 times trailing earnings while STX trades for 5.35 times earnings. Forward earnings are more favorable – WDC sells for a forward earnings ratio of 3.4 vs. STX’s 2.8. Forward earnings are elevated thanks to a temporary HDD shortage.
Still, on an earnings yield basis, HDD makers do look like a value at first look.
Next to hard disk drives are solid state drives – flash storage mediums. Newer laptop computers, tablets, and mobile phones are more likely to use SSDs, which require less energy, provide faster reading and writing, and take up significantly less space in personal computing and communication devices.
On the basis of cost, HDD have a clear advantage. A 128 gigabyte solid state drive costs $120. A 1024 GB HDD drive sells for $100. Hard disk drives are 8 times larger and cost 15% less – tough to beat in a very competitive computer market.
But HDD storage is colossal compared to solid state drives, and moving parts make it difficult to use in small consumer tech products that are likely to collect dust, be dropped onto concrete, and generally exposed to less than favorable day to day operating conditions. This is why MP3 players on store shelves started with HDDs before rapidly moving to SSDs, even in large capacity sizes. HDDs simply do not stand up to the wear and tear of a consumer’s lifestyle.
Changing Consumer Preferences
Tablets and mobile technology increasingly relies on SSDs to keep a small form factor popular with consumers. As more people move to tablets and portable media players – and switch away from laptops or desktops – HDDs lose sales to SSDs. So far, estimates suggest only 10-20% of tablet buyers purchase a tablet to displace the need for a laptop or desktop, a key market for HDDs. The loss is relatively minimal to total HDD demand.
Tablets bring about the need for more cloud storage, however. Server racks, which need substantial storage space at a low cost, are another major HDD customer. It is economically impossible for SSDs to take over the very valuable storage market from HDDs any time soon.
So, in some way, a decline in HDD technology is good for SSDs, which is good for HDDs. As more products use SSDs, more servers are built using HDDs because of basic economics.
Bulls vs. Bears
Hard drive bulls might say that the hard drive market is never going away. Inexpensive laptops and desktops require competitively priced storage space, a market segment practically owned by HDD makers. Also, large server operations will never turn away from the hard disk drive business, given that HDDs will remain cost effective for servers long after the consumer market fades (if it does so at all.)
Seagate CEO Steve Luczo is naturally one of the biggest bulls on hard disk drives. He cites the capital spending requirements of hard disk makers vs. SDD makers. In a Forbes article, he notes that adding an extra 100 exabytes to production would cost Seagate $1 billion. Makers of SSDs would have to spend $10 billion upfront to do the same.
That gives HDDs a long-term competitive advantage, especially since HDDs are likely to become less expensive on a cost to storage basis than SSDs. SSDs have to add new capacity in massive “chunks” whereas hard disk makers can add new capacity in much smaller quantities.
Bears see the near certainty in fewer HDD-based computers and more SSD laptops and tablets. Where a family might have two laptops with HDDs now, the family of the future may have 2 SSD laptops with additional HDD-based storage on the cloud. The HDD industry benefits from selling consumers too much storage space – most users will never use all of the 640 GB which ships with most mid-priced desktop computers. A small SSD plus cloud-based server space for data will be good enough for a wide cross-section of computer users.
Personally, I align with the bulls. While HDDs are an “old tech” product, competing SSDs cannot fall in price to be widely adopted as quickly as Wall Street anticipates – which is the only way for SSDs to beat out HDDs. What do you think?
Can old technology continue to capture most of the market? Or do HDDs face certain obsolescence?
A value investor and blogger who enjoys discovering the hidden gems available on the public markets.