We previously released a coverage launch article about Western Digital Corporation (NASDAQ:WDC) where we evaluated the basic business and structure of our valuation of its various businesses. Just to recap, Western Digital is a leading provider of electronic data storage products such as hard disk drives for personal storage and enterprise applications. Its main products are hard disk drives or HDDs. The company manufactures electronic data storage products, addressing solutions across a broad spectrum for clients such as enterprise applications, client compute applications and client non-compute applications.
We have broken down the company into three major divisions:
1) PC, tablet and laptop storage, which constitutes roughly 38% of the company’s value
2) Enterprise and cloud storage, which constitutes roughly 31% of the company’s value
3) TV, DVR, consoles and external storage, which constitutes roughly 20% of the company’s value
We highlight some key trends affecting the business and the overall storage market here.
Growth In High Definition Digital Content Drives Storage Requirement
The high growth of digital content is driving the need for high capacity storage to aggregate, host, distribute, manage, backup 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 drive the demand for high capacity disk drives solutions in the end-user market.
According to Cisco, the global cloud traffic will grow at an annual rate of 45% and reach 4.3 zetabytes by 2016 while global data center traffic will grow to 6.6 zetabytes. Nearly 20% of this data will be solely due to online video streaming, email and music. Western Digital is leveraging this end-user content creating phenomenon with value add products focusing on consumers such as DVR backups and wireless backup networks as well as media storage devices designed to connect easily with different media sources such as TV’s, radios and gaming consoles.
In early October 2011, flooding in Bangkok, Thailand caused many manufacturing industrial parks to shut down operations. Factories supporting the HDD industry’s supply chain were concentrated within these industrial parks to reduce costs and improve logistics and during this temporary suspension of operations, demand exceeded supply, leading to high prices in HDD’s thereby increasing the industry’s average selling price per unit. Western Digital’s ASP for hard disks surged from $46 in the first quarter to $65 in the fourth quarter of 2012. The industry has recovered since the flooding, and we believe that the prices will stabilize before falling as operations ramp up again.
Shift From Hard Disk Drives To Solid State Drives
All leading laptop manufacturers are now offering laptops with a hybrid HDD-SSD primary memory and high-end, high-performance laptops with complete SSD memory. Solid state drives are more expensive per GB, and this is the primary reason for the slow adoption of SSD as the primary memory component. As production capacity increases and technology changes lead to a drop in SSD prices, we can expect that solid state drives will become standard for notebooks and netbooks. These drives are unlikely to find extensive use in desktops in the near future.
Western Digital is one of the leading makers of thin form factor hybrid storage drives designed specifically for use in ultrabooks. The company has launched hybrid drives which have performance and size comparable to SSD drives but are relatively much cheaper and have higher capacity storage. The biggest drawbacks of the SSD drives like capacity and cost are addressed by Western Digital’s hybrid drives.
The helium filled drives are aimed at the enterprise storage market, which is a large and growing market owning to the shift towards cloud computing, and this gives Western Digital an edge over other players in the short term. The wafer-thin 5mm hybrid drive designed by Western Digital for use in hybrid laptops and ultrabooks gives them an edge over HDD makers as well as SSD makers as they provide high capacity storage for a much lower price point. This is the primary reason why we estimate a higher value for its PC, tablet and laptop storage unit over comparable players like Seagate.
Rise Of The Tablet Computer
All tablet computers use solid state memory chips as their primary storage memory, and we estimate that tablet sales will outstrip notebook and netbook sales by the end of our forecast period, and this is a major trend shaping the storage industry. HDD memory is relatively unresponsive, slow and bulky, and will not find application in tablet computers. The increasing popularity of tablet computers is the primary reason for growth in the SSD space.
Growth In Cloud Computing And Remote Storage Services
We expect Western Digital’s enterprise business to be driven by businesses deploying cloud computing environments in an effort to pool resources and cut costs. 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.
To achieve the high performance needed with cloud computing, we expect the hybrid SSD-HDD enterprise storage drives to become popular in the future. Western Digital already has high performance products in this space, and while it cannot compete with established players like EMC and NetApp, it does have an advantage over players like Seagate which caters to the small and medium enterprise segment.
We currently have a $64 Trefis Price Estimate for Western Digital, which is 25% over its current market price.