Will Apple Adoption Lead to the Emergence of the Hybrid Drive?

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Hybrid hard drives, or "fusion drives," that combine traditional hardrives with flash memory chips, are not new and Seagate (NASDAQ: STX) has traditionally had a virtual monopoly on them. Because of this, the drives have been expensive and have lagged in terms of industry adoption. The technology may see some increased interest, however, as companies begin to consider the technology and drag it into the mainstream spotlight. Western Digital Corp (NASDAQ: WDC) is also entering the hybrid market, attempting to squeeze in a place next to Seagate, as well as find a differentiating place in the crowded solid-state drive (SSD) market, where both the former and the latter companies see potential to gain lost ground and generate profits from "fusion drives."

The All-Mighty Apple:

According to analyst John Rydning of IDC:

"Hybrid drives will be the future of mass market cheap storage... Although so far we haven't seen much traction, I see all the pieces falling into place now that even Apple is selling these."

Apple (NASDAQ: AAPL) has integrated the technology into its new iMacs, looking to lower costs and increase capacity, while also increasing speed. Fusion drives apparently allow the company to do this, and now have a huge mainstream supporter in Apple. Seagate's VP of Marketing Scott Horn, has told Reuters that Apple's adoption has already led to an increasing number of calls from OEMs. Western Digital's president also commented briefly, saying that "It is important to note that Apple is validating the value of hybrid technologies."

Ultrabook Adoption:

Hybridization is also coming into Intel (NASDAQ: INTC) powered Ultrabooks. Emil Yappert, VP of product line management at Seagate stated that:

“Solid state hybrid drives will help Ultrabook designers achieve key price points and performance goals... SSHD products are being embraced by industry leaders such as Intel as demonstrated by the collaborative efforts with the SATA-IO member companies leading to Seagate’s new hybrid drive capabilities, which can significantly improve SSHD performance and help drive general adoption in the PC ecosystem during 2013 and beyond.”

Hybrid SSD penetration into Ultrabooks is projected by some to dramatically increase in 2013, especially as a cheaper alternative to pure solid-state drives. Ultrabooks may also see a wider adoption rate in 2013 after a somewhat disappointing 2012, which should bolster demand. 

The Future of Hybrid

Demand for storage is increasing infinitely, and hybrid drives may be the savior for traditional hard drive companies like Seagate and Western Digital, who control 90% of the hard drive market- but aren't as established in the crowded SSD market as competitors. Adoption from Apple is huge and Ultrabooks should help sustain demand. Gartner is projecting the hybrid market to grow by over 100 million units by the time 2016 comes around, an increase from an estimate of only 1.8 million in 2011. Western Digital and Seagate seem to be on the forefront of the hybrid drive market.

Valuations:

As can be seen, both companies are down in the dumps with insultingly low P/E ratios. The hybrid market will probably not kick in quickly, so these will most likely be unaffected by hybrid adoption short-term either. If bought as buy-and-hold investments, however, there is a different story to consider:

Both companies pay dividends, but Seagate's is double that of Western Digital's. Seagate has a high-yield, as well as history of stock buybacks, which shows that if history repeats, the patient investor will be handsomely rewarded for waiting. Capital appreciation may take awhile, but Seagate's yield is incredibly attractive. Especially since the company generates $873 million in free cash flow and has a solid balance sheet with Cash and ST investments just about equalling long-term debt of around $2.8 billion. Total assets also trump liabilities, according to data provided by ycharts.

Needham and Co's Richard Kuegle summed things up when he stated that:

"Hybrid as a category is going to became the de-facto standard for disk drives as we go out one or two years... There's this great need to have higher throughput from disk drives but at the same time still keeping the capacity and the cost down."

Seagate is the leader in this trend going forward and should see significant benefits from it, the question that stands is- How long will it take?


Jharry1 owns shares of Intel. The Motley Fool owns shares of Apple, Intel, and Western Digital. Motley Fool newsletter services recommend Apple and Intel. 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!

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