Is 2010 the “Year of the Hard Disk Drives?”

By Travis Johnson, Stock Gumshoe, April 15, 2010

I was reading earlier today about Porter Stansberry’s aggressive short bet against the computer hard drive makers, who seem to have been the canaries in the coal mine regarding computer sales for several years — and at the same time I received a teaser from Louis Navellier for his Blue Chip Growth teasing that the big pop in shares of his favorite hard drive company is “just the beginning.”

So I thought, let’s let them slug it out virtual-style, and you can decide for yourself whether it’s better to go long or short the hard drive makers … and, as soon as I sniff out which one of them is Louis’ favorite, we can see if that’s the one you’d buy (or sell) as well.

First, Porter’s opinion. It was excerpted in his Daily Crux today under the “two stocks to sell immediately” headline, and apparently Seagate and Western Digital, the two dominant pure-play companies in this space, are his favorite short sales as recommended in his Investment Advisory newsletter back in February. According to the excerpt, he believes their product is slowly becoming obsolete thanks largely to flash memory improvements, and that new demand is coming primarily from the corporate segment, which is bad (I assume because of lower margins or the product mix of these companies, don’t know). He also quotes an analyst as noting the likelihood of margin squeezes as their biggest customers, HP and Dell, try to reduce costs.

So that’s the big picture — hard drives are becoming obsolete and less profitable, according to Porter and the analyst he quotes.

But what about Louis Navellier? It’s been my experience that a climbing share price, improving margins, and increased analyst estimates make him love a stock, and both of these companies have been in that position during their recent turnarouind. So which is his favorite?

Here’s the tease:

“I don’t know about you, but when it comes to the inner workings of my computer, I’m at a loss. But one thing I do know is that hard drives are vitally important—they store all of our data and programs.

“So when you have a company that produces hard drives for a wide range of tech gadgets—personal computers, consumer electronics, high-end servers and mainframes—to some of the biggest computer manufacturers in the world (Dell, Hewlett-Packard, EMC, IBM and Sun Microsystems), I definitely take notice.

“This company is truly a global leader, with 75% of its sales to manufacturers outside of the U.S. And thanks to the strong demand for its products, the company was able to post a 33% increase in sales in the fourth quarter—an outstanding performance in a recession.

“But here’s the really incredible news—after posting a $2.8 billion earnings loss in the fourth quarter of 2008, the company bounced back, with earnings surging to $533 million! Now, that’s a strong turnaround.

“Looking forward, 2010 is expected to be the ‘year of the hard disk drives,’ according to a Wedbush Morgan analyst. This company’s shares already popped nearly 20% in February on the strength of this industry—and this is just the beginning.”

And the envelope, please? This one is clearly Seagate Technology (STX)

Seagate undoubtedly got the attention of Navellier’s system thanks to a huge “beat” on the fourth quarter earnings, fourth quarter sales did indeed “surge” 33% and earnings came in at $1.04, which is more than 50% above the analyst estimate. And he’s been publicly touting the shares as a recent favorite as well, not just teasing them in his email ads.

It’s pretty clear that Porter Stansberry is not the only one who is feeling extra cautious about the hard drive business, though — otherwise, there’s no way we’d see a stock with that kind of earnings growth trading at a bargain basement forward PE ratio of 5 (Western Digital’s is super low as well, right around 7).

In fact, if you ignore the fundamentals of the business they’re in and just look at the analyst projections, you’d be an idiot not to buy Seagate — analysts think they’ll grow 11% a year for five years, they’re very profitable, they have no net debt, and they trade at 5X earnings. That’s a ridiculous bargain — but of course, we should never put too much weight on what an analyst thinks the five year growth rate will be, since they’re just making it up (sorry to all my economist friends, I meant to say “forecasting”).

Western Digital and Seagate are certainly tough competitors, but it’s also worth looking at the charts from their last few turbulent years — Seagate has done far better over the past year, but that’s largely because they fell much harder when the economy swooned and therefore had the room to enjoy a much higher bounce off the bottom, over the last five years WDC has been a much better performer for your portfolio. For what it’s worth, though analysts have been opining on both sides of this, the Wedbush Morgan analyst (presumably the same one who declared that “year of the hard drive”) also recently downgraded Seagate in part because they might lose some market share to WDC (that’s the same analyst that Porter quoted in the Daily Crux above, just FYI).

So in this case it really comes down to predicting the future — do you believe the growth on the ground, and think their spectacular performance will continue? Or do you fear the future and think these stocks will either eat themselves with margin-crushing competition, or lose out on their buggy whip business to the hot new iron horses coming out of the assembly line? Let us know which way you lean with a comment below.

And of course, if you’ve ever been a subscriber to either Porter Stansberry’s Investment Advisory or Louis Navellier’s Blue Chip Growth, click on either of those titles to review them for us over at Stock Gumshoe Reviews — we’ve heard from dozens of subscribers to both letters, but we want to know what you think!


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23 Comments on "Is 2010 the “Year of the Hard Disk Drives?”"

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Marco
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Marco
April 15, 2010 8:07 pm

STX is actually new strong buy recommendations by L. Navallier as of March '10

Alex
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Alex
April 15, 2010 8:45 pm

And the companies that produce flash memory,what abot them?

Rick Parton
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Rick Parton
April 15, 2010 8:48 pm

Travis: Maybe they are both right! I suspect the introduction of Windows 7 has re-energized the replacement cycle for PCs (I just bought a new laptop for this reason) so Navallier is probably right in the near term. However, the change in storage technology combined with "cloud" computing probably means that Stansberry is right in the mid to longer term.
Ricktoronto

HerbK
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HerbK
April 15, 2010 9:01 pm

IMHO while it is true that storage capacity of flash memory is increasing, I would suggest that hard drives will continue to offer higher total capacity and lower capacity per dollar for some time to come. With continuing increase in storage capacity demand due to download/ storage of music, photos, video, etc. , I would think it is premature to declare the end of hard drives.

Jason
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Jason
April 15, 2010 9:26 pm
The cloud is the biggest threat to mechanical hard drives. For the foreseeable future, these types of hard drives will maintain a significant size and cost advantage over flash storage. Probably for the next 5 years, maybe longer. Flash storage *cannot* challenge that size advantage while it lasts unless we stop storing large amounts of media on our computers, essentially negating the need for such large hard drives. Netflix, Hulu, Last.fm, the more we start using streaming services and stop downloading, the more hard drive makers will feel the squeeze. This could *conceivably* happen within the next few years, but… Read more »
FraidyMan
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FraidyMan
April 15, 2010 10:29 pm

Comcast and your other friendly infrastructure giants are throttling streams already, and they will probably start charging more per meg on downloads in the near future, so the cloud will get a little pricier… Meanwhile, HD's are mushrooming and I can't see that ending. However, I do a little tech support, and I wouldn't keep a Seagate drive if you gave it to me. The newest generation overheats and they die like flies. Might as well be the River Styx

Chris
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Chris
April 16, 2010 4:14 am
First, I would say Flash will not compete on cost per GB for quite some time and it has its own reliability problems at the higher capacity points. Next, the cloud will never take the place of HDD for personal data such as pics, movies, data, etc… it will only really be good for applications. Finally, there is a bubble at work here – there has been a two year hold back on refreshing computers due to economic hard times and conservative spending. Now things are loosening a bit and people / companies are refreshing and upgrading again. but there… Read more »
Paul
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Paul
April 16, 2010 4:36 am
I am an IT professional in State Government and I can assure you that Hard disk drives are alive and well in our server farm and our enterprise backup application. We just bought a product from Data Domain that we use to backup all our data and it's based on Hard drive technology. Admittedly, it compresses the data by de-duplicating, which results in considerably less hard drive space than we previously used, but……it uses hard drive technology. I will also be buying new Unix servers this year and they will have ….. wait for it……Hard disk drives. They are IBM… Read more »
Ayub
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Ayub
April 16, 2010 5:22 am

Great comments from the Techies, while their views certainly helps readers such as myself (technical illiterate), but I do have some aspect commercially using layman's logic: Find a HD co that puts asides allocations for crossing up to cloud. For example, PHP is a well-known open source platform that is being eyed upon by Giants like Micorsoft and IBM. Innovative efforts from these HD companies into cloud area will certainly be worth watching.

sox
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sox
April 16, 2010 10:35 am
Both will do well! The demand is for higher capacity. Hard drives provide the cost advantage. Watch EMC , Netapp and others for the volume demand for solid state drives. These vendors have an enormous installed base and can double or tripple their capacity for existing systems with larger hard drives. Quick profits, good margins and easy sales. That is just the fault tolerant portion of the market. High availability systems like Web servers, firewalls etc (the things that connect you to the database) will likely look for the best availabilty numbers in solid state drives because these systems dont… Read more »
eniac
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eniac
April 16, 2010 12:57 pm

I work in the medical field (radiology) and the PACS environment is growing at a rapid pace. The move from film to digital xray keeps pushing the need to upgrade their storage capacity. I believe there is a huge pipeline here for existing upgrades

travis
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travis
April 16, 2010 4:18 pm

Notice the recent WD acquisition of siliconsystems, inc?http://www.wdc.com/en/company/releases/PressRelea
WD and Segate are both well aware of the magnetic vs flash debate. WD is for sure hedging their bet.

Longleaf
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Longleaf
April 16, 2010 12:15 pm

For what it's worth, I subscribe to Charles Mizrahi's Inevitable Wealth Protfolio and they just posted Western (WDC) as a buy.

Jeff
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Jeff
April 16, 2010 8:02 pm

Just remember one thing. Porter Stansberry is the same guy that told everyone that would listen to buy shares in Boston Scientific back when it was over $10 per share because it was going to go up 30 % immediately and would most likely double by the end of last year. Anyone looked at Boston Scientific’s price lately?

Christopher Korody
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April 16, 2010 11:47 pm
So there is one thing about data. It has to be captured at the moment of creation, or else it is lost. Given the growing number of creators and the increasing uses for data, it is highly unlikely that the global demand for storage will shrink any time soon. That said, the storage market will continue to evolve along its current paths. Small personal devices like tablets and smart phones will use flash memory drives (SDD) to achieve their design packages, to enhance reliability from shock, and to reduce power consumption and heat. SDD devices are projected to grow extremely… Read more »
Larry DiBiaso
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Larry DiBiaso
April 17, 2010 2:45 am
WDC and STX have a great business in memories and storage. The hard drive has been a good product for them, with continued tech improvements. With that said, both companies are technically savy, and no doubt are heavily into the new solid state memory technologies. I doubt that they will let the nanotechs get by them. What they don't design themselves, they could easily add through M&A. These stocks will follow the market, especially if we enter a nasty pullback interval; that would provide a good buying opportunity to enjoy the next wave of high tech mass storage.
Davud
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Davud
April 18, 2010 7:53 am

But is buying WDC and STX at a high a good idea? Looks like WDC is about as high as its ever been in the past right now and the HD industry is fairly mature.

FrankC
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FrankC
April 20, 2010 7:18 pm
I think the hard drive market depends on the over economy. If people get some money in their pockets, they tend to spend for fun rather than solidly for reasons. Like in people's house, the more space they get, the more junks they store, most likely because they like it that way rather than need it. Do they really need those large spaces. There usually is no obvious or compelling reason to store so much junks, but people do this all the time, until they get squeezed by money. Same thing for hard drives. When economics is shaky, everyone tighten… Read more »
Norm Rockwell
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April 21, 2010 6:34 pm

I donno. I did short WDC and STX at Frank's advice but then covered after a few dollars down because of the reco by Louis. Now I am on the fence. gud luk

Ilan
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Ilan
April 24, 2010 12:58 am

Well, both are up over 10% from publishing, and WDC beat analysts' estimates. I guess they still have room to grow, especially with such low P/E. My money (literally) is on WDC based on better reputation and superior tech.

hwai
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hwai
April 25, 2010 4:10 am

I have bet on STX based on Louis's reco and my old memory tells me STX is better. I could be wrong with WDC so I will look at it more and decide which one to go for.

DZ Guest
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DZ Guest
August 30, 2010 6:48 pm
Once in a while, people more or less have the tendency to take the eccentric, or even extreme, attitude in looking at this world. When Radio was first invented, some frontier people claimed the days of the newspaper were numbered. Decades later after that there were claims of the death of the radio when the TV was born. The last death prediction I heard was around1990 when Motorola was making so much money in selling its brick-size & brick-weight wireless phone that the company was crazy enough to try to launch 100 something satellites to the space in order to… Read more »
Stansberry CS
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Stansberry CS
February 13, 2012 10:26 am

If you have any questions about Stansberry and Associates, please do not hesitate to call customer service at 1-888-261-2693. We would be happy to assist you. We are open Monday – Friday 9-5 EST.

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