IBM Joins the Storage War Fray
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On the heels of an announcement in recent weeks that both Micron Technology Inc. (NASDAQ: MU) and SanDisk Corp. (NASDAQ: SNDK) would be shifting a portion of their focus from NAND flash memory to solid state drives (SSD), IBM (NYSE: IBM) announced it plans to acquire Texas Memory Systems, a flash memory provider with several key relationships. When one considers the reliance of SSD technology on flash memory and the expected growth of this market, the moves of all three companies seems not only prudent but shrewd.
While the details of the transaction were not released, the news was welcomed by investors who have been squarely behind the company. Terri Mitchell, an IBM integration executive, was quoted as saying, “It will really be a great enabler, not just for storage, but for our systems as well.” The move likely comes in response to the 7% revenue decline in the IBM division that encompasses storage. The company has publicly stated its intention to make roughly $20 billion in acquisitions over the next several years in order to firm up its product line.
Of these three players, IBM has the most well-established enterprise business. This could present a mixed outlook, given the clear headwinds that are present on the global macroeconomic stage. Ultimately, however, IBM is a performer that is accomplished at navigating under such circumstances and is likely to use shifting market trends and acquisition might to drive growth.
The Storage Market
Storage has become a hotly contested frontier, largely as a result of the huge growth expectations coming out of the sector. Bernstein Research’s Mark Newman writes:
On the demand side, we see SSDs including Cache/Hybrid HDDs to keep driving bit demand, growing from 14% in 2011 to 39% of overall NAND GB demand by 2015.... We estimate GB demand to grow 71% in 2012 and a further 62% in 2013. In contrast we see no wafer growth, and with GB/wafer growth falling as technology advancement begins to slow down we see a large gap developing between supply and demand that must be filled with additional wafer capacity by 2013 2Q. Without capacity adds the NAND industry will fall into dangerously low inventory levels and extreme undersupply by 2H 2013.
These projections are roughly in line with those put forth by IDC, the notable technology research firm. It expects significant growth in enterprise consumption over the next several years.
Gaining a surface understanding of the technology involved is quite helpful in putting many of these moves into the proper context. As technology consumers have dramatically changed their habits over the past several years, storage demands have shifted. Where PC demand has fallen, the demand for smartphone and tablet memory has exploded. These later devices are too compact for cumbersome hard drives, but flash memory has filled this gap. Flash memory has been an effective plug in smaller devices, but it does not carry the capacity of larger drives. Flash is, however, a critical component in SSD, which is rapidly replacing conventional hard drives. SSD is not only more stable and durable, a significant advantage in high-end notebook computers, it allows data to be accessed more quickly. This brings the conversation back full circle to enterprise solutions that rely on speed to perform.
Micron and SanDisk
While Micron and SanDisk are unlikely to make inroads into the enterprise business sufficient to be disruptive to IBM, the same cannot be said for the impact on Seagate Technology (NASDAQ: STX) and Western Digital (NASDAQ: WDC). These two companies both operate in the SSD space and have been dependent on outside sources for NAND. Not only is NAND one of the most expensive components in SSD, the cost of building a fabrication facility is prohibitively expensive. While there has been no direct conversation as to how the moves by Micron and SanDisk may impact the supply chains of Seagate and Western Digital, this will be a critical area to watch moving forward as things begin to shake out.
While there are strong arguments for each of these three companies, each have different strengths and weaknesses. IBM is clearly the leader in enterprise business, while SanDisk has a larger consumer product presence. While either of these characteristics may provide insulation against market fluctuations, they may also provide drag. Ultimately these are emerging as the top three players in the storage market and are the companies to own. If holding exposure to all three is not an option, selecting the ancillary exposure that one prefers should be the deciding factor.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and 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. If you have questions about this post or the Fool’s blog network, click here for information.