How Investing In Data Companies Can Generate Returns
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The data storage market is expected to reach $16.9 billion in 2015, up from $8 billion last year. The ever increasing need to manage data created a huge demand for data storage devices and services. Also, the customers are shifting to hybrid laptops/tablets and cloud storage. This shift drives the opportunities for data storage devices manufacturers and service providers to cater to the increasing demand.
I have chosen three such companies to analyze, in order to see if this shifting trend will be beneficial for investors.
New device and divestiture for future growth
Western Digital’s (NASDAQ: WDC) revenue from the PC hard disk segment declined to $33.6 billion in the first half of 2013, down from $44.5 billion in the same half last year.
Viviti, a wholly owned subsidiary of Western Digital, manufactures a '3.5-inch hard disk' for PCs. The demand for the PC hard disk is declining because of the shift towards hybrid laptops/tablets, and Viviti doesn’t manufacture hard disks for any of these. Looking at the declining demand, Western Digital has planned to divest the Viviti business and is waiting for approval from the finance ministry of China. The ministry will announce its approval in March, 2014. After the divestiture, the company will save the operating expenses of $400 million on the Viviti business by June, 2015.
HGST, a Western Digital company, launched the fastest and most advanced multi-level drives in the 12Gb/s SAS SSD family on April 9, 2013. Under this, the company launched three new models: the Ultrastar SSD800MH, Ultrastar SSD800MM and Ultrastar SSD1000MR. This device belongs to the solid-state drives, or SSD class. It will support most demanding applications, such as high-frequency trading, cloud computing, online gaming and big data. With this device, input/output response time of data will reduce by 300%.
Eventually, the global market share of the company's SSD device will reach 16% by the year 2014, from 8% last year.
New storage platform for higher revenue
Big Data business is expected to reach $47 billion by 2017 from $11.4 billion in 2012. Looking at this prospect, EMC (NYSE: EMC), in collaboration with VMware and General Electric, will form a new platform-as-a-service, or Paas company, called “Pivotal”, which EMC will control 62% of. Pivotal will be a platform to create cloud applications that will help users make sense of their unstructured data. EMC has contributed $400 million in Pivotal. By the year end of 2017, Pivotal is expected to generate $1 billion in revenue.
The company has introduced the world's first software-defined storage platform – ViPR. The unique feature of this device is its ability to manage both data storage infrastructure and data stored within that infrastructure. This is designed to work with the cloud environment. The device will improve data storage management as it will be completely automated. Brocade’s “Gen 5 Fibre Channel storage area network” solutions are also integrated with the ViPR. This will help EMC to realize 50,000 joint customers of both EMC and Brocade. It is expected that ViPR is a big move towards long term revenue generation by the company.
New product launch with strong dividend
Seagate’s (NASDAQ: STX) profits from laptop data storage devices decreased to $183 million in the third quarter of 2013 from $416 million in the second quarter of 2012. According to a Trefis report, hybrid laptop and tablet usage has increased 100% in the past 5 years. The company used to manufacture 9mm thick hard drive for laptops. With the growing demand of the hybrid laptop/tablet, it has launched a 5mm thick hard drive on June 2, 2013. This device will target the hybrid laptops and tablets market. In the long run, the company's global market share of hybrid laptop/tablet storage devices is expected to reach 10.50% by the year end 2015, while it is only at 5% this year.
Seagate is the top dividend-paying stock of the NASDAQ 100 companies. The company reported $678 million of cash flow in the third quarter of 2013, and has distributed 75% of the free cash flow through dividend and share redemption. With its current operations, the company is expecting to generate $844 million of cash in the fourth-quarter. It is planning to distribute 70% of its cash flow to its shareholders. With an average dividend yield of 3.2%, Seagate has a history of paying timely dividend to its shareholders since 2002.
Western Digital’s market share is expected to rise in the near future and it will also save operating expenses in the coming time. This will be beneficial for investors. EMC’s investment in the Pivotal platform and its first move towards software-defined storage platform will benefit the company in the long run. Seagate is expected to increase its market share of laptop storage devices globally and with its strong dividend history, investors can expect better growth.
Considering the above potential of the companies, I recommend a buy for all three companies.
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.
Shweta Dubey has no position in any stocks mentioned. The Motley Fool owns shares of EMC 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!