Seagate Should Surf These Storage Trends To $38

Seagate Technology (NASDAQ:STX), a leading provider of electronic data storage products, has seen its stock rise by more than 20% in the last three months. The stock is currently hovering near its all-time high, in tandem with the S&P Index and is just 5% shy of our $38 Price Estimate. The huge appreciation in Seagate’s stock price can be attributed to a few factors.

Solid state drives (SSDs) are seeing robust growth on the back of soaring tablet sales and growing adoption in notebooks relative to hard disk drives (HDDs). Further, increasing demand for rich formats such as HD for media consumption is leading to growth in demand for high capacity disk drive solutions. In addition, growth in cloud computing demand is boosting high capacity storage demand from enterprises. Below we take a detailed look at these trends.

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Continued Growth In Solid State Drive Demand

Nowadays, all leading laptop manufacturers are offering laptops with a hybrid HDD-SSD primary memory and high-end, high-performance laptops with complete SSD memory. However, SSDs are currently much more expensive per GB than HDDs, leading to slow adoption of SSDs as primary memory components. On average, SSDs are at least twice as expensive as regular HDDs and this cost differential is still causing price-conscious customers and enterprises to prefer HDDs.

However, going forward SSD production costs are likely to go down significantly due to an improvement in technology. We expect that these cost savings will mostly be passed on to customers, which should lead to a decline in the average selling price per gigabyte (GB) for SSDs. Consequently, lower average prices should boost demand as the cost advantage of HDDs will be diminished.

Another factor driving growth in SSD demand is consumers’ growing preference for tablets over PCs. We estimate that tablet sales will outstrip notebook and netbook sales by the end of our forecast period. All tablet computers use solid state memory chips as their primary storage memory since HDD memory generally is comparatively unresponsive and bulky. Therefore the increasing popularity of tablet computers should add to the expected surge in the SSD space.

Seagate Addressing This Demand

Seagate has been increasing its focus on its SSD business to tap the growing demand. Last year, Seagate made investments in companies such as LaCie and DensBits to acquire expertise in the SSD and USB flash storage market. Seagate and DensBits are working on building “low-cost, high-performance” consumer SSDs. ^[1] Further, LaCie has given Seagate access to an established consumer brand known for innovative designs. ^[2] While Seagate was late to adapt to this trend in the SSD space, the aforementioned acquisitions, its relationships with industry-leading original equipment manufacturers (OEMs), sales clout, and production facilities should help Seagate outperform the overall SSD market growth and see its SSD market share increase going forward.

Digital Content, Cloud Computing And Remote Storage Driving Demand

The high growth rate of digital content is driving the need for high capacity storage to aggregate, host, distribute, manage, back up and use digital content. The need to access rich data and content is being driven by a highly mobile and increasingly connected user base. The traditional enterprise and client compute markets will continue to demand high capacity storage solutions and will be best served by hard disk drives where manufacturers compete on the ability to deliver cost effective, reliable and energy efficient mass storage devices. The increasing demand for HD content for media consumption and rich formats, such as HD DVD and Blu-Ray drives the demand for high capacity disk drive solutions in the end-user market.

According to Cisco, global cloud traffic will grow at an annual rate of 45% and reach 4.3 zettabytes (1 zettabyte is equal to about 1 quadrillion GB) by 2016, while global data center traffic will grow to 6.6 zettabytes. ^[3] Nearly 20% of this data will be solely due to online video streaming, email and music. Seagate is leveraging this end-user content creating phenomenon with value added products such as DVR backups and wireless backup networks. The list also includes media storage devices designed to connect easily with different media sources such as TV’s, radios and gaming consoles.

In addition, remote storage is becoming a standard for most enterprises and has even gained traction with retail customers with services like iCloud, Dropbox, Skydrive and Google Drive. Further, more businesses are deploying cloud computing environments in an effort to pool resources and cut costs. To achieve the high performance needed with cloud computing, we expect hybrid SSD-HDD enterprise storage drives to become more popular in the future, which should drive growth in Seagate’s enterprise business.

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1. Seagate And DensBits Announce Strategic Agreement For Development Of Solid State Drives For Consumer And Enterprise Markets, Seagate, May 25 2012 [↩]
2. Seagate And LaCie Announce Exclusive Agreement With Intent For Seagate To Acquire Controlling Interest In LaCie, Seagate, May 23 2012 [↩]
3. Cisco Global Cloud Index Forecasts Cloud Traffic to Grow Sixfold by 2016, Cisco, Oct 23 2012 [↩]