2 Tech Outperformers To Buy

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

Intel (NASDAQ: INTC) has been receiving a lot of attention lately, mainly due to its strong ultra-book sales and its upcoming Haswell series. Analysts at Lazard recently upgraded Intel citing that ultrabook sales will further increase in 2013, which will further drive up Intel’s revenue from its mobile processors. But Intel is not my stock pick. Ultrabooks come equipped with Solid State Drives (SSD), and strong ultrabook sales present bullish prospects for SSD manufacturers.

According IHS iSuppli Storage Space Market Brief, SSD shipments could increase to 83 million units in 2013 and 239 million units by 2016 (over 65% CAGR). The report also suggested that SSD shipments are well on track to deliver a 100% growth rate in 2012 on a YoY basis. Altogether this presents a bullish case for NAND chip manufacturers like Seagate (NASDAQ: STX), OCZ Technology Group (NASDAQ: OCZ) and SanDisk (NASDAQ: SNDK).

The Numbers Game

Seagate has been manufacturing Hard Disk Drives (HDD) for a long time, but it was only in the past few years that the company went on to manufacture SSDs and hybrid disks. Amongst the mentioned peers, shares of Seagate have risen the most over the last 1 year, owing to growth in both SSD and HDD shipments. Digital content creation is at its peak, and with the introduction of 4k resolution, more storage space would be required.

According to IHS Isuppli,"The HDD industry will face myriad challenges in 2013. Shipments for desktop PCs will slip this year, while notebook sales are under pressure as consumers continue to favor smartphones and tablets. The declining price of SSDs also will allow them to take away some share from conventional HDDs.”


STX data by YCharts

(comparative stock returns over the last 3 years. 5 year data not available)

Both Seagate and Western Digital Corporation (NASDAQ: WDC) derive a major share of their revenues from HDD shipments, and the latest IHS Isuppli statistics suggests that the HDD manufacturers could have a dull year ahead. Shares of Western Digital trade at modest forward P/E but a high PEG indicating that its shares are overvalued w.r.t its growth prospects. Analysts estimate its EPS to shrink by 1.14% in 2013.

Company

Forward P/E

PEG

Dividend Yield

Net Profit Margin

Seagate

6.4x

0.8x

4.3%

19.8%

Western Digital

6.1x

3.9x

2%

13.3%

OCZ Technology

-N/A

-0.2x

0%

-3.66%

SanDisk

12.52x

1.2x

0%

8.26%

Seagate is Still Attractive?

But Seagate still looks attractive. Last year, Seagate had acquired Samsung’s disk drive business and recently the company announced that it would be expanding its SSD line up. Moreover, its management also announced that it is working jointly with Vrident to develop PCIe SSDs for data centres.

It’s a well-known fact that SSDs are taking over, but their high cost/GB has been a major deterrent for its adoption. The costs were high due to Thai floods. However SSD prices have declined significantly over the last 6 months, down from $0.9/GB to $0.47/GB, and that’s a nearly 50%.

Data centres would naturally prefer to switch to SSDs, as they would be required to setup less number of servers for data intensive services. Vrident is currently the technology leader in PCIe SSDs and this move to cater to the data centres would greatly benefit Seagate.

Additionally, shares of Seagate offer an attractive dividend yield of 4.3%, with a modest payout of 18%. The company enjoys the highest net margins amongst the mentioned peers, and it has clearly outperformed its peers in terms of stock appreciation, over the last 3 years. Still its shares appear to be deeply undervalued.

Reasons to Buy SanDisk

SanDisk is the global leader in Flash Memory Storage technology, and is one of the most preferred brands in NAND chips for mobile devices (SD cards). A recent report stated that the market for SD cards is estimated to reach $21.3 billion by 2018, and this geographically diversified market leader looks well poised to take advantage of the global growth potential.

Its quarterly revenues from SSD shipments grew by a massive 95% YoY, and its gross cash and marketable securities rose to $5.7 billion, up by 5.4% on a sequential basis. SanDisk has also been outperforming its peers over the last 5 years, and the recent results only corroborate that its growth momentum is solid and genuine.

Foolish Conclusion

In my opinion, investors should avoid OCZ Technology due to its continued poor financial performance. Its shares are down by 52% over the last 3 years and its management has still not come up with a solid turnaround plan. I believe OCZ Technology would make a poor contrarian play, due to the absence of almost any positive trigger. Needless to say, SanDisk is a growth pick here. But Seagate appears to be a value play! Its restructuring of operations to align itself with changing market conditions, which offers great growth potential. As you might have guessed it, both Seagate and SanDisk get a Foolish Buy Rating.


PiyushArora has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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