Can the Cloud Save this Failing Industry?

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Seagate Technology (NASDAQ: STX) is one of the largest data storage companies in the world. It is a pioneer in hard disk drives manufacturing industry. In March, Seagate also declared that it is the first company that has successfully shipped 2 billion hard drives.

For the quarter that ended in March 2013, Seagate reported revenue of around $3.5 billion, a gross margin of 26.9% and net income of $416 million. Due to higher sales of internet storage devices, Seagate's results were better than estimated as the company's estimated revenue for the quarter was $3.37 billion. The company expects that both demand and price will rise in the second half of the year.

Storage demand

The demand for internet storage devices is continually increasing, allowing customers to store data in the cloud and access from any place and from any device. Seagate’s rival, Western Digital (NASDAQ: WDC), is also flourishing due to the growing demands for cloud-based Internet storage. Cloud storage allows customers to shift more easily to smartphones and tablets, reducing their dependence on personal computer hard drives.

For the quarter that ended in March 2013, cloud hard drives represented 10% of the total 55 million hard drives that were shipped to customers. Due to increasing demand, Seagate estimated revenue in the range of $3.3 to $3.45 billion for the current quarter though analysts believe that it will actually be above $3.5 billion. Western Digital reported revenue of $3.76 billion for the quarter, which was above analyst’s estimate of $3.5 billion. Seagate is currently trading at around $43 and has risen 34% this year.

In the storage industry, Western Digital and Samsung are the chief rivals of Seagate. Both Seagate and Western Digital are almost same in term of market share. Aside from Seagate and Western Digital, Fusion-io (NYSE: FIO) is also the top manufacturer of flash memory storage devices. 

Fusion-io provides storage solutions to global enterprises. In the third quarter ended march 2013 Fusion reported a revenue of $87.7 million, down 27% over the previous quarter and reported a net loss of $20 million. The revenue decrease was due to lower dependence on Facebook and Apple. These are the company's main flash NAND customers, accounting for 50% of its revenue in the second quarter. Fusion-io is expecting that Facebook and Apple will resume their ordering of products in the current quarter and expects a revenue of about $110 million for the quarter as a result. This is a bullish sign for the stock that its major customers are two of the world's fastest-growing companies. The company also received a lot of attention in 2009 by employing Apple co-founder Steve Wozniak.

Declining demand

There is industry speculation that the hard disk drive (HDD) will become obsolete just like a floppy drive, largely because solid-state drives (SDD) are becoming more affordable and have the benefit of greater speed. The financial results of hard drive manufacturing companies show something different, however. Despite stiff competition, both Seagate and Western Digital are both showing rises in profitability.

Cloud storage

Despite the decline in demand for PCs by almost 14% in the first three months of 2013, both Seagate and Western Digital revenues for the recently-ended quarters are above analysts’ estimates. It is true that customers are shifting from PCs to smartphones and that this should have an impact on hard drive sales, but this move is more than being offset by the rise in demand of cloud storage. Industry figures show that the cloud is becoming increasingly popular and the demand for cloud-based storage is increasing by approximately 30% year-over-year. Additionally, Western Digital expects a 3% increase in hard drive sales by the end of the year. In 2012, Seagate paid a healthy dividend of $372 million and announced a dividend of $0.38 for the quarter that ended in March 2013.

Because of increasing demand for SSDs and decline in the PC market, investors are worried about the future of Seagate and Western Digital. As SSDs are expensive, most companies will take their time when it comes to completely abandoning conventional hard disks. A website that provides online streaming services such as YouTube needs a huge amount of storage, and all of this storage is provided in tiered storage structures; this is a prime reason behind the profitability of both Seagate and Western Digital.

Conclusion

Seagate and Western Digital are working hard to compete in the SSD arena. Last year, Seagate acquired Samsung’s subsidiary for $ 1.4 billion and Western Digital purchased Hitachi’s for $4.8 billion. The increasing demand for cloud storage solutions will help both companies to maintain a stable growth despite shortfalls in PC demand, making them solid long term investments.

While Seagate Technology pays a significant and growing dividend and seems able to generate the cash flow to support it, a global slowdown in demand for digital memory storage has begun to put pressure on margins. Is Seagate worthy of your investment consideration (and dollars)? The Motley Fool answers this question and more in our most in-depth Seagate research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.

 


Red Chip 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!

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