The Death of Mechanical HDDs is Nigh
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Seagate Technologies (NASDAQ: STX) has announced that earnings in the next quarter will be down 10%. Seagate manufactures mechanical disk drives (HDDs) that mostly end up in computers. At least one analyst, Vijay Rakesh at Sterne Agee, has taken this to mean that the upcoming quarter for computer processor manufacturers Intel (NASDAQ: INTC) and AMD (NYSE: AMD) will be worse than guided by those companies.
In the past, this might have been a reasonable assessment. However, two recent changes in the market suggest a completely different explanation for what is going on. First, the floods in Thailand that created a shortage of HDD components is still affecting the market for HDDs. If one visits NewEgg and looks at the prices of mechanical HDDs, one will find that the minimum price is $65, which is much higher than the historical low of approximately $30. The low priced mechanical HDD market has not come back to where it was. Second, when one looks on NewEgg for solid state hard drives (SSDs), there are many being offered for less than $65, even 60GB models that would be sufficient for users that don't store a lot of media or play high end games. Obviously, a consumer channel supplier like NewEgg is going to be impacted more heavily than system manufacturers like Dell and HP that have bigger contracts with HDD suppliers like Seagate. However, it is becoming clear that the low end mechanical HDD is less attractive than it once was.
Instead, what seems to be happening is that SSDs are taking a sizable bite out of the HDD business during this moment of HDD supply chain vulnerability. This has been an inevitable outcome, HDDs were supplanted from music players years ago and it was only a matter of time before it would happen in PCs. The Seagate announcement suggests that a confluence of mechanical HDD component scarcity and pressure from SSD competition is going to take a big bite out of mechanical HDDs during the current down cycle in computer demand.
As a result of this coming shift, not only is it not prudent to gauge the prospects of Intel and AMD by projections given by a mechanical HDD company, there will be winners as well. Companies that produce flash memory for SSDs will see revenues do better than the rest of the industry as they steal market share, particularly Micron (NASDAQ: MU) which is a significant player in the business, both producing flash memory and selling Crucial branded SSDs. This should materialize especially in low-end notebooks and second hard drives where SSDs will replace mechanical HDD from manufacturers like Seagate and Western Digital (NASDAQ: WDC), both of which will have their business prospects lag the computing market at large unless they become invested in producing solid state hard drives.
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