Which Storage Company Is Better Positioned for NAND Flash?
Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Seagate (NASDAQ: STX) has been manufacturing HDDs (Hard Disk Drives) for a long time, but it was only in the past few years that the company went on to manufacture SSDs (Solid State Drives) and hybrid disks (Hard Disk + on-board NAND Flash). Seagate’s CEO Steve Luczo said, by 2017 over 85% of Seagate's HDD production will be of hybrid drives, covering both consumer and enterprise products. Seagate is now producing its third generation 2.5-inch Momentus XT hybrid drive, arch-rival Western Digital (NASDAQ: WDC) being late to the party.
HDD industry will face a myriad of challenges in 2013 and beyond with the total addressable market (TAM) forecast to witness a significant slowdown going forward. With digital content creation at its peak requiring huge storage space, I feel Seagate will outperform Western Digital in the stock market in 2013, which has not yet registered any significant progress with SSDs and hybrid disks.
SSDs: The Future of Storage
One popular argument to explain why SSDs have not displaced the HDDs in all PCs is that there isn’t enough NAND flash production capacity to support this business and there never can be.
This argument has been circulating in the tech-world since 2007 when Western Digital CEO John Coyne first discussed it at an IDEMA conference, followed by SanDisk’s Eli Harari at the Flash Memory Summit in 2008. Recently in last April Seagate's CEO Steve Luczo also echoed the same argument in a Forbes interview. These people are captains of the industry. Their arguments make people stand up and take notice.
It’s a really flawed argument. It goes like this:
- In 2011 400 exabytes of HDDs shipped
- A typical NAND flash wafer fabrication plant (a “fab”) outputs 3.4 exabytes in a year and costs $6 billion
- To replace HDDs with NAND would require 117 of these fabs at a total cost of $700 billion
- Nobody has that kind of money
Although $700 billion is not going to be invested in a $25 billion market organically, there is no reason to rule out a $700 billion investment from sources external to the market, provided there is a clear path to profits from that investment.
The real argument is that there has not been such an investment because there was no reason to expect consumers to change their behavior. Today consumers select a PC based on price and HDD capacity, and this rules out their choosing an SSD. This is the real reason that HDD makers don't fear that their business will be snatched away from them by NAND flash makers.
But things are changing fast. SSDs are increasingly being used in thin and light notebook and Ultrabook computers because they are lighter, start-up and run applications faster, and have a longer battery life. As flash storage becomes cheaper over time, the demand for 10,000 rpm hard drives and desktop PC disk drives will fall. Should a HDD supplier, facing this developing threat, fight the oncoming flash flood or redefine themselves and adopt flash technology, thus cannibalizing their own HDD sales?
According IHS iSuppli Storage Space Market Brief, SSD shipments could increase to 83 million units in 2013 and 239 million units by 2016 (over 65% CAGR). How are Seagate and Western Digital preparing themselves in adapting this sea change?
What Should HDD Makers Do?
If disk manufacturers are serious about getting into the flash drive business, they have to have their own controller operation. Advanced controller functionality is needed to turn its raw relatively useless working life into a product that will last for five years or so.
Seagate announced its strategic partnership with DensBits, a maker of solid state drive controllers, for this purpose. Western Digital is out in the relative controller cold with its mostly embedded SSD business. It needs to develop or buy in technology if it is to expand out of that niche. With the emergence of cheaper 3-bit per cell flash (TLC), not having such a controller means Western Digital can't ship TLC-based drives and competitors will undercut the company on pricing.
Secondly, the only way to get certainty of flash chip supply is by having a flash fab relationship. Money is the seal on such alliances. Seagate has such an alliance with Samsung and they will build on their alliance. But where is Western Digital -- out in the cold again.
Seagate Perfectly Positioned for NAND Flash with the Virident Deal
The steps taken by Seagate as mentioned above enabled the company delivering Pulsar SSDs and hybrid disk drives, while Western Digital has only promised a niche embedded SSD business. Seagate’s initiative to become a prominent player in the booming solid state NAND storage industry has set the company at a high growth path.
Seagate has not been as successful with flash drives as SanDisk (NASDAQ: SNDK), OCZ, Micron, LSI, Fusion-io and other flash storage suppliers. SanDisk has been the global leader in Flash Memory Storage technology, and is one of the most preferred brands in NAND chips for mobile devices (SD cards). A recent report stated that the market for SD cards is estimated to reach $21.3 billion by 2018, and SanDisk looks well poised to take advantage of the global growth potential.
While SanDisk isn't a big player in the SSD game, it does expect the drives to account for more of its profits as a greater number of device-makers use them instead of traditional hard disk drives. As I stated above, Ultrabooks are expected to account for a major boost in SSD production, as companies flock to the drives for their thinner profiles and speedy boot-up times.
With the Virident deal announced recently, Seagate’s flash drive business is set to skyrocket. With a $40 million investment in Virident Systems, Seagate has moved into the PCIe SSD space with one of the highest-performing products available serving both Seagate and Virident well. In fact Seagate can emerge as a tough competitor for even SanDisk going forward.
It’s quite clear that Seagate is aiming at the high margin, high ASP segments of the market, with an emphasis on enterprise flash. Western Digital is lagging way behind. I would recommend buying Seagate’s stock at the current price level.
Anindya7 has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!