3 Stocks to Profit From Data Growth
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With rising internet usage and population growth, data traffic and database volume is increasing day by day. According to IDC, database volume is set to increase to 40 zetabytes by 2020 from 2.8 zetabytes in 2012. The demand for data storage companies is constantly growing, as big companies need storage solutions to manage their databases efficiently. These companies have increased their spending on storage solutions. Three such data storage companies are continuously upgrading products offered and adapting to the changing demand. What do they have to offer to investors?
SSD is the way ahead in data storage
SanDisk's (NASDAQ: SNDK) solid state drive segment sales contributed 20% of the company's total revenue in the first quarter of 2013, compared to only 10% in the first quarter of 2012. SSD is a device made of integrated circuits that store data. According to IHS iSuppli, global SSD revenue, both client and enterprise, is expected to rise from $7 billion in 2012 to $10.7 billion in 2013.
Client SSD should also show a significant demand growth of 53% year-over-year to 18.49 million units in the first quarter of 2014. Client SSD has an advantage in that it consumes low power, is much quieter, and is more reliable than its HDD counterpart. SanDisk supplies SSDs to top ten personal computer manufacturers, and SSD sales are expected to contribute 25% to its total revenue in 2014.
In May 2013, SanDisk made strategic changes in its share repurchase program; it will return 70% of free cash flow to its shareholders. It currently has $1.25 billion for repurchase by 2016. It will use $800 million in share repurchases this year. This will bring total shares outstanding down by approximately 13 million shares to 228.52 million shares. The company has already bought $230 million worth of shares in 2012 and $234 million this year as of May 2013 from its cash flow. This buyback will offset the dilution of shares, which happened due to employee incentive awards.
External storage is poised for growth
NetApp (NASDAQ: NTAP) has a 10.7% market share in the total data storage market, and it derives around 60% of its total revenue from its network attached storage, or NAS, segment. The worldwide NAS was a $5.2 billion market in 2012 and represents 22% of the overall storage market. The price of NAS products is less than $300,000. As companies adopt low priced network storage solutions, there is increasing demand for these products.
In addition, NAS installations are easier than other storage devices, which are very complex. With rising demand, the overall NAS market is estimated to grow at 12.2% CAGR through 2017, increasing its total data storage market share to 33%. This rising demand of NAS is expected to take the segment's revenue to $4.01 billion in 2014 rising from $3.80 billion in 2013.
NetApp has also announced a restructuring initiative to improve its operating margin. It is planning a workforce reduction of around 900 employees this year. This represents about a 7% reduction of the total work force. The company will also bear $50 million-$60 million as a pre-tax charge relating to severance. The company is targeting reduction in its under-performing areas. The workforce reduction will be from the Engenio division, as this division isn’t showing good results. NetApp expects this restructuring will save it around $100 million annually before taxes from this year, which will rise next year.
Despite weak performance in Americas, future looks bright
Teradata (NYSE: TDC) posted 4% revenue decline year-over-year in the first quarter of 2013. This was due to decrease in the number of orders, which were worth more than $5 million. The value of total orders declined $69 million year-over-year in the first quarter of 2013. Overall IT budgets were down, reducing large IT spending. The demand is expected to rise by 13% year-over-year in the second half of this year, whereas it declined 12% year-over-year in the first half of the year.
Teradata rolled out “Teradata portfolio of Hadoop” in June 2013. Hadoop is a Big Data, open source software framework that can manage large data at significant speed. It will integrate with Teradata’s Aster Big Data, which it acquired in 2011. The integration will help customers manage large amounts of unstructured data at a high speed and relatively low cost. A number of customers, including General Motors, use Hadoop in conjunction with Teradata's technology.
Companies pass further work completed on Hadoop on to Teradata's data warehouse, thus increasing business for Teradata. Along with the benefits, the integration of Hadoop can deliver 100% demand growth for Aster Big Data this year.
Overall, data storage companies provide an excellent opportunity for investors to gain in the future. The growth of SSDs has revolutionized the industry, and SanDisk is taking full advantage. Companies migrating towards advanced network storage devices will provide opportunity to NetApp. Revenue from large orders is set to pick up for Teradata in the second half of 2013, and the integration of Hadoop should increase volume in the future.
Therefore, I recommend buying all these stocks.
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Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends Teradata. 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!