Over the last few years, storage companies have witnessed a surge in sales from Solid State Drives (SSDs), with market leaders Western Digital Corporation (NASDAQ: WDC) and Seagate Technology (NASDAQ:STX) generating improved revenues from these high-margin drives.
The industry-wide shift is justified by a growing need for higher efficiency, longer-lasting drives and lower power consumption. Despite better performance, SSDs are unlikely to completely cannibalize traditional hard disk drives (HDDs), mainly because of the huge price gap between the two.  In an attempt to deliver economical substitutes to more expensive SSDs, Western Digital recently announced the launch of its Helium-filled drive and Seagate looks to explore the option of Shingled Magnetic Recording drives. WDC’s launch of its dual drive, the Black2, highlights a similar trend.
Below we take a look at the viability of the dual drive and how it will affect our $72 price estimate for the company
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Solid State Drives
Solid state drives have integrated circuit units that store data, unlike regular hard disk drives that have a rotating disk and a moving read/write head making them more prone to damage under physical shock. In addition, it is much faster to access and transfer data on the integrated circuit storage compared to a conventional rotating disk. The absence of moving parts also ensures that no noise is generated while using SSDs. Consequently, solid state drives consume less power than regular hard drives. All these reasons make SSDs a logical choice for replacing the traditional hard disk drives.
Primary storage for tablets and smartphones requires drives that are fast, efficient and consume much less space. SSD flash drives are therefore ideal for portable handheld devices although they are much more expensive than traditional HDDs. Burgeoning sales of mobile devices, where SSDs are a priority, have helped shore up demand for solid state drives.
Why Are Alternatives To SSDs Required?
The main reason to introduce an alternative to SSDs is that they are sometimes too expensive for laptops and PCs. While smartphones and tablets do not really have an option given the portability concerns, non-mobile devices can generally do without an all-SSD option to keep manufacturing costs lower. Considering the comparatively lower margins, laptops and PCs are generally more sensitive to high-cost storage options than mobile devices. For example, while Apple commands margins of 30-40% on the 9.7″ iPad and 50-60% on the iPhone 5, the Macbook line has margins in the range of 20-30%.
In this context, it is important to note that while solid state drives for both PCs and laptops cost around 80 cents per GB, regular HDDs are priced at anywhere between 7-8 cents per GB.  Even though the price per GB for both solid state drives and hard disk drives has declined over the years, the price differential between the two is likely to remain.
Furthermore, the number of laptop and PC units shipped have shown a slight decline since the iPad was introduced in 2010. The widespread popularity of tablets and smartphones has caused a reduced dependence on PCs and laptops. SSDs are not expected to become cheaper than traditional hard disks, and a reduction in laptop and PC demand has seen storage drive manufacturers look for cost-effective alternatives.
The Dual Drive – Best Of Both Worlds
The recently launched Western Digital Black 2 dual-drive has elements of both solid state drives as well as standard hard drives. The dual drive has a 120GB solid state drive and a separate 1TB hard drive.  This coupling gives end-users the discretion to store data in their preferred drive. Data that needs to be accessed frequently, or large files that need to be accessed at once, can be stored in the SSD. For example, installing the operating system on the SSD reduces the boot time and heavy games, programs and high definition content runs without lags. Smaller files such as work files, music and photos or data that isn’t very frequently accessed can be stored on the regular hard disk instead of the SSD.
However, these drives should not be confused with the solid state hybrid drives (SSHD) launched by Western Digital, Seagate and Toshiba earlier this year. Those SSHDs make use of solid state memory only as cache memory for the device and use a regular hard disk as storage. There is no dedicated solid state storage space like in the dual drive. While this makes the SSHD faster for access than regular HDDs, there is no major advantage in reading or accessing bulk data. 
Market Opportunity For Western Digital
The Black2, with a combined storage of more than 1,100GB, is priced at $300, which is roughly the same price as a Seagate 240GB SDD for laptops. The pricing gives WDC an edge over all solid state drives because end-users get more space, higher flexibility for data storage and better performance for the same investment.
The dual drive could become popular with the target customer base of programmers, gamers and video editors – basically users that have a large data storage requirement but still require high speed access. Subsequently, the Black2 could result in a slowdown in the rate of adoption of pure SSDs.  We also expect the dual drives to become more popular than hybrid drives considering the added benefits of the dual storage option.
However, it is difficult to assess the direct impact that dual drives will have on WDC’s valuation because the product is new in the market. While the Black2 should indeed help WDC grow its production of laptop and PC HDD units, the drives could also cannibalize the company’s pure HDD sales and in the process increase the average selling price per unit of HDDs. Western Digital should experience first-mover’s advantage for the dual drive until competition moves in. A 3-4% increase in market share of PC and laptop HDD segment in the long run and even a conservative 5% increase in the overall average price per unit of laptop and PC HDDs could lead to a 3% upside to our price estimate.Notes: