The Next Casualty of the PC’s Decline

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

The traditional PC is in decline. Sales of PCs fell by 14% in the first quarter of the year, the worst drop on record. As sales have declined, PC-related stocks have struggled.

Increasingly, consumers are opting for mobile devices over traditional PCs, while business users are finding that their existing devices are still more than capable of handling the necessary software tasks.

But even if you think the death of the PC has been greatly exaggerated, there’s one PC-related industry that seems to be in trouble no matter what.

Jim Chanos thinks PCs are going away

Short seller Jim Chanos is famed for betting against Enron ahead of its demise. In recent years, he’s shifted to PC-related names, going bearish on both Dell and Hewlett-Packard prior to their shares collapsing in the second half of 2012.

Now, Chanos thinks you should sell your hard drive stocks. Specifically, you should absolutely dump Seagate (NASDAQ: STX) and probably Western Digital (NASDAQ: WDC), too.

Chanos seems to agree with Apple when it comes to the future of computing -- that is to say, mobile devices will replace most PCs. There’s plenty of reason to doubt this -- PCs are still needed for heavy duty work -- but even if you do, it’s hard to argue against the decline of hard drives.

The death of the hard drive

Someone shopping for a new PC will find that many of them lack hard drives. Cheaper laptops still offer 500GB hard drives, but at the high end, laptops sporting hard drives are hard to find -- most have been replaced entirely by solid state drives.

For the same amount of money, solid state drives offer significantly less storage capacity, but boast much greater speeds. A computer equipped with a solid state drive and Windows 8 can boot up literally in a matter of seconds.

Both Seagate and Western Digital have largely stayed out of the consumer solid state market. Seagate unveiled its first solid state drive for the consumer market only days ago, while Western Digital is sticking with hybrid drives. Overall, both companies have little exposure; the market is largely dominated by SanDisk, OCZ and Samsung (NASDAQOTH: SSNLF).

There’s also the growing trend of cloud storage and, in the long run, cloud computing. Right now, anyone can get several gigabytes worth of cloud storage for free. Dropbox, Google (Google Docs) and Microsoft (Skydrive) all offer free storage, and more is available to those willing to pay a monthly fee.

For every gigabyte of cloud storage a user has, that’s potentially one less gigabyte of local storage they need.

Then, there’s the trend of cloud computing. For example, I’m writing this piece using Google Docs, which is a program stored entirely on Google’s servers -- it takes up no storage space on my hard drive. In time, more applications will likely adopt this model, meaning that increasingly users will find themselves needing less and less hard drive space for their applications.

The same can be said for media files. Years ago, a user may have needed to keep their music and movie files stored locally. But now, services like Netflix and Spotify mean that more users are increasingly streaming their media over the Internet rather than keeping it on their hard drive.

Obviously, hard drives will still have their place in servers for many years to come. But the server/client relationship is inherently more efficient and requires less total storage -- a movie streamed from Netflix’s servers to millions of customers is more efficient than each of those million having a copy of the film on their own, individual hard drives.

Seagate’s accounting issues

Chanos hates Seagate more than Western Digital, according to Business Insider. While both companies are facing secular headwinds (the death of the industry), Seagate is exhibiting a number of particularly grim characteristics.

Samsung used to make hard drives, but sold the division to Seagate. Seagate then turned around and put $1 billion of goodwill on its books. As Chanos noted, this tactic can be used to cover up for cash flow issues.

In addition to that, Chanos notes that Seagate’s top stock holders have been selling out of their positions en masse, while a major executive just left the company.

Why did Samsung get out?

Obviously Samsung sold its hard drive division for a reason. In recent years, the company has emerged as a dominant consumer electronics company. Samsung’s lineup of Galaxy mobile devices has challenged Apple for supremacy, while the company remains a major player in the traditional PC market.

One thing to know about Samsung is that, when it comes to vertical integration, no other company is even close. Apple may be more integrated in the sense that Apple makes its own software instead of turning to Google or Microsoft (as in Samsung’s case), but until recently, Apple was heavily dependent on Samsung for many of the components used in the iPhone and iPad.

Conversely, Samsung mostly uses parts it makes. Until it sold to Seagate, this included hard drives in its PCs.

Given Samsung’s position as a major electronics maker, and one that’s heavily vertically integrated, it’s very telling that the company was willing to sell its hard drive division. Clearly, it doesn't see much of a future for hard drives.

RIP hard drives

The death of the hard drive market appears imminent. Mobile devices eschew hard drives entirely, while even traditional PCs are dumping the hard drive in favor of the solid state drive. Advances in cloud storage and computing, as well as media streaming, have lessened the need for local storage.

Server use will ensure that hard drives are needed for many more years, but the total demand for hard drives should be expected to drop precipitously in the coming quarters. That will likely wreak havoc on the stock of hard drive makers.

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 its 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.


Joe Kurtz 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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