Seagate: A Look At The PC, Tablet And Laptop Disks Division

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Seagate Technology

Despite weakness in the PC and notebook market, Seagate Technology‘s (NASDAQ:STX) stock has risen almost 40% this year. While the sharp climb in its stock price is mainly due to continued storage demand from the enterprise market, the situation is expected to improve in the PC and notebook market going forward.

Seagate is the second largest player in the hard disk drive market even if it has lately been conceding some market share to its largest rival Western Digital. However, with the introduction of new hybrid drives for desktops and new thinnest ever HDDs, we expect the company to maintain its market share in the PC, Tablet and Laptop Disks division from 2014 onward.

Below we take a closer look at our expectations in the PC, Tablet and Laptop Disks division, which according to our estimates, is the largest contributor to our $46 price estimate for Seagate.

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See Our Full Analysis Of Seagate

PC And Notebook Market To Improve Going Forward

According to IDC, PC and notebook sales dropped over 10% last quarter, making it the longest ever period of sustained decline. The drop is attributed to slowing demand from emerging markets, consumer softness in mature markets and IT spending cuts amid a weak macroeconomic environment. The cannibalization from tablets is another reason for the weak PC market.

While we expect soaring tablet sales to weigh on the demand for PC’s, PC sales are expected to improve in the second half of 2013 as enterprises and retail users upgrade computers once spending recovers. As per Seagate’s largest rival, Western Digital, the total addressable market (TAM) is expected to improve in the ongoing quarter to 135 million-140 million HDDs. While the figure is close to a TAM of 139 million in the same period last year, it is slightly better than the TAM of 132 million in the June quarter.

Seagate Well Placed In The HDD Market

The storage industry went through a consolidation phase after being hit by the introduction of SSDs amid a slowdown in PC sales. Seagate bought Samsung’s hard disk drive (HDD) business in December 2011, and Western Digital followed suit by acquiring a relatively larger player in the market, Hitachi GST, in 2012. According to our estimates, Seagate’s market share jumped from nearly 25% in 2010 to over 38% in 2012. However, the last two quarters’ earnings have shown that Seagate has conceded some market share to Western Digital. The Hitachi acquisition brought Western Digital a number of promising products, which is now helping it in gaining market share.

While we expect a slight decline in Seagate’s market share in 2013, we don’t expect it to continue thereafter for a number of reasons. In March, Seagate unveiled the world’s first ever 3.5 inch solid state hybrid hard drive (SSHD) to target desktop computers. The company has already had hybrid drives for ultrabooks for quite sometime. Hybrid drives are a combination of NAND memory (solid state drives or SSDs) and conventional hard disk drives (HDDs). They provide higher IOPS and increase the responsiveness of HDDs by adding solid-state storage for advanced caching of large, frequently used chunks of data. SSHDs are gaining traction as they have performance comparable to SSDs, while being relatively cheaper. On average, SSDs are at least twice as expensive as regular HDDs, and this cost differential is causing price-conscious retail consumers to stick to devices with HDDs. While SSD memory production costs are expected to decline in the longer term, a significant investment is required to replace a vast portion of the HDD market. This is expected to continue to act as a barrier to any huge pick up in enterprise SSD demand. This provides significant room for growth to SSHDs in the near future.

While both HDD market leaders Seagate and Western Digital already have their own versions of SSHDs – SSHDs have mostly been limited to the mobile 2.5 inch form factor. This results in higher prices per GB. Their speed is also limited to 5400 RPM in most of the drives. For the same reasons, they are mostly used in ultrabooks (ultra-thin notebook computers). With the launch of its 3.5 inch drive, Seagate is targeting desktop computers. While within the whole PC and notebook market, ultrabooks are expected to lead the growth with growing consumer preference, desktop computers still constitute a significant chunk of the PC market. Therefore, any success here should lend support to Seagate’s market share. As PC and notebook demand revives in the second half of 2013, we expect Seagate to benefit from the launch.

Further, the company also unveiled the thinnest ever HDD at the Computex computer show in Taipei in June. The 5 mm thin and just 3.3 ounce heavy 500 GB HDD is designed to save nearly 25% space than its previous generation 7 mm disk drive. This new ultra-thin drive will provide Seagate an advantage over Western Digital, as PC makers would certainly prefer the cheaper, thinner and lighter disk drive to compare with the tablets. While Western Digital also launched the thinnest 1 TB HDD (7 mm), we expect Seagate to eventually launch the thinner 5 mm 1 TB disk. Further, the HDD market primarily comprises of PC and notebooks, the average capacity is close to 500 GBs. Seagate has also given the new drive a standard SATA connector while making it reverse-compatible with 7 mm and 9.5 mm drive enclosures. This will enable Seagate to tap demand from the disk replacement market as well.

The new ultra-thin HDD will also help the company tap the tablet market. Currently, all tablets use flash memory as their primary storage memory, because 7 mm and 9.5 mm HDDs are too bulky to be used in tablets. This consequently results in higher prices for tablets, which makes them un-affordable for many, especially in the emerging markets. However, by using the ultra-thin HDD, tablet manufactures can create new affordable tablets and target the huge untapped market. Seagate demoed its ultra-thin HDD on an Android tablet. While there will be a trade-off in performance and battery life in tablets compared with those using SSDs, Seagate’s new ultra-thin HDD will enable PC makers to introduce hybrid disks similar to ultrabooks in order to counter performance issues while increasing internal storage capacity.

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