Western Digital’s PC Storage In Focus: Will Tablets Continue To Impact Sales?

Western Digital (NASDAQ:WDC) is one of the largest hard drive manufacturers in the world with a 45% market share in global hard drive unit sales. Western Digital and rival Seagate (NASDAQ:STX) enjoy a near duopoly in the business, with the two companies shipping over 80% of the total hard drives shipped in 2013 and in the current year thus far. Western Digital shipped out 246 million hard drives in 2013, of which nearly 160 million units were either PC or laptop storage drives. Similarly, 144 million hard drives out of a total 190 million units sold by Seagate in 2013 were compute storage (PC or laptop) units. Needless to say, compute storage is a key contributor to total hard drive units sales for both companies.

In recent years, PC and laptop sales have declined, leading to lower shipments of corresponding hard drives. In this article we take a look at worldwide trends in the PC and notebooks markets and its impact on Western Digital. According to our estimates, PC and Laptop storage division makes up over 30% of our $100 price estimate for Western Digital’s stock. Our price estimate is in line with the current market price.

See our full analysis of Western Digital here

Tablet Threat For PCs And Notebooks

According to data compiled by Gartner, the total number of compute unit shipments, which includes traditional desktop PCs and notebooks (excluding thin client devices such as the Chromebooks), have been 7% lower this year. Gartner expects a total of just over 276 million PCs and notebooks to be shipped in 2014, compared to 296 million last year. ^[1] These unit shipments are further expected to decline to under 262 million units in 2015, with tablet sales gaining most from this decline. The growth in tablet sales is seemingly the key threat to PC and notebook sales worldwide, due to which tablet device sales are expected to surpass PC sales for the first time ever in 2015.

However, the surge in tablet sales as witnessed in the last few years has slowed down in 2014 and is expected to further decline in the coming years. The main reasons for the more than 50% increase in tablet sales in 2013 were shrinking prices and the portability of tablets, leading to tablets becoming a substitute for notebooks. However, users aren’t replacing their tablets as quickly as IDC and Gartner initially expected. Gartner initially expected a 13% rise in tablet sales in 2014, which it revised to 11% recently. Moreover, tablet sales growth rates are even slower in mature markets such as the U.S, where more than half the households already have a tablet device with no intention to replace the device in the next three years. ^[2] Another reason for the slowdown in tablet sales is the rise of phablets (phone + tablets), which are basically larger-sized smartphones. As a result, tablet vendors are contemplating slower product refresh cycles for tablet devices.

Personal desktop computers and laptops can be used for creating as well as consuming digital content, while tablets are not considered content creating devices. The slate form factor of tablet devices makes it difficult to perform precision tasks while input channels are limited compared to compared to full fledged computers. ^[3] As a result, it is possible that tablets or devices with a slate form-factor may not replace the usage of computing devices. IDC and Gartner expect the growth in tablet sales to slow down to nearly flat growth by 2018 as the initial surge has subsided.

Trends For PC And Notebook Shipments

As a result of declining compute-storage units, hard drive manufacturers have been focusing on alternate storage technologies to cater to the fast-growing market segments, namely enterprise and cloud storage. However, PC and notebook storage units still contribute to a sizable chunk of revenues for Western Digital, with compute storage units making up nearly two-thirds of total unit shipments for the company.

Computing giant Microsoft (NASDAQ:MSFT) decided to end support for the XP operating system in April this year, which led a lot of customers to refresh their computers. As a result, the rate of decline in the number of PC shipments in 2014 has been lower than previous years. However, Western Digital’s PC unit shipments (not including hard drives for laptops) have continued to decline at previous year levels of 4-5%. PC hard drives shipped in the first three quarters this year have declined by over 5% y-o-y to 49 million units. We currently forecast Western Digital to ship just under 65 million units in 2014, with a more gradual 3-4% decline in unit shipments through the end of our forecast period.

On the other hand, notebook unit shipments have witnessed a lower rate of decline in shipments this year, in keeping with the industry trends. Western Digital witnessed a 7% y-o-y decline in laptop hard drive sales in 2013 to 91 million units. Comparatively, the company has posted nearly flat y-o-y growth in unit shipments in the first three quarters this calendar year. This is attributable to price drops for thin laptops, higher affordability of touch-based laptops and hybrid 2-in-1 laptops that can also be used as a tablet. We expect Western Digital to post flat laptop storage unit sales this year over 2013, with a gradual rise in laptop hard drives through the end of our forecast period.

The rise in hybrid drives and SSDs is likely to push the average selling price (ASP) per drive up. Solid State Hybrid drives (SSHDs) and SSDs both have higher margins than traditional rotating-disc hard drive. A faster adoption of these drives was partially responsible for a 25 basis point improvement in Western Digital’s gross margin in the most recent quarter. However, the company-wide ASP per unit shipped by Western Digital was flat over the prior year quarter at $58 per drive. We forecast the notebooks ASP to rise gradually from $50 in 2014 to just under $54 through the end of the decade.

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1. Gartner: Device Shipments Break 2.4B Units In 2014, Tablets To Overtake PC Sales In 2015, Tech Crunch, July 2014 [↩]
2. Tablet sales growth slows dramatically, Computer World, October 2014 [↩]
3. Do you consume or create content with your tablet?, Android and Me, January 2014 [↩]