Western Digital Can Bank On A Solid Year For Enterprise Storage

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Hard drive manufacturer Western Digital (NASDAQ:WDC) is one of the largest storage companies in the world with a 45% global market share in hard drive unit shipments. Seagate (NASDAQ:STX) and Western Digital enjoy a near duopoly in the hard drive market, with the two companies shipping nearly 85% of the total hard drives shipped in 2014. Western Digital shipped out over 249 million hard drives in 2014, of which about 30 million units were enterprise-grade storage drives. Similarly, 33 million hard drives out of a total 224 million units sold by Seagate in 2014 were enterprise storage hard drive units. Comparatively, over 60% of the hard drive units shipped out by the storage companies in 2014 were compute storage units (for use in desktops and laptops). Although enterprise-grade hard drives contribute only about 12% of the total units shipped by Western Digital, it is a key area of growth for the company. Total enterprise unit shipments have growth at a CAGR of 37% over the last five years, with growth expected to continue. In this article we take a look at worldwide trends in the enterprise storage market and its impact on Western Digital. According to our estimates, enterprise and cloud storage division makes up about 36% of our $104 price estimate for Western Digital’s stock. Our price estimate is slightly lower than the current market price.

See our full analysis of Western Digital here


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Enterprise And Cloud Storage Division

Western Digital’s enterprise storage division caters to businesses and institutional clients with its storage products designed for mission critical and nearline applications. The market for mission critical enterprise storage solutions has grown at a rapid pace over the last few years, as cloud-based storage has shifted consumers away from storing data locally. Additionally, the number of data centers which need to maintain backups of data and information on servers and large businesses that require high-end data storage has risen significantly over the years. Some of Western Digital’s large customers belong to various industries such as healthcare, telecommunications, Internet retailers, electronics and financial services. Providing high performance enterprise class disk drives with sophisticated firmware and communications technology to such institutional clients or storage system aggregators is a key part of the company’s enterprise storage business. Within enterprise and cloud storage, Western Digital has various product lines that cater to different businesses and end users. The WD Red product line is specifically designed for network-attached storage (NAS) systems, while the WD XE is used in mission critical applications where low-power consumption is the top priority. The enterprise storage division also includes Helium-filled drives, which the company introduced in late-2013 under the brand name Ultrastar.

Western Digital shipped out about 6 million enterprise-grade storage units in calendar year 2009, which has risen to over 30 million units shipped in 2014. This highlights the increase in global demand for high-end storage and Western Digital’s growing presence in the market. According to data compiled by research firm ReportsnReports, the global enterprise storage market is expected to grow at a CAGR of over 15% from 2015 through 2019. [1] With the expected growth in enterprise-grade storage to continue over the next few years, we currently forecast Western Digital to sell nearly 60 million storage units by the end of our forecast period.

Role Of Enterprise-Grade SSDs

In addition to the traditional spinning disk hard drives, the company also provides solid-state drives (SSDs), especially in the case of enterprise storage solutions. NAND-flash based storage or SSDs have numerous advantages over rotating-disk drives, ranging from the sheer speed of read/write operations, low latency in data access, relatively low power consumption, as well as lighter and more durable drives with a greater resistance to mechanical shock. As a result, customers are increasingly switching over to SSD or SSD hybrids for mission critical storage and storage providers have witnessed a surge in demand for SSD-based storage.

According to an IDC report, enterprise-grade SSDs are expected to grow from a $2.5 billion market in 2012 to about $7.2 billion through 2017. [2] This was evidenced by the contribution of enterprise SSDs to Western Digital’s revenues over the same period. The company entered into an agreement with Intel (NASDAQ:INTC) in mid-2013 to develop SSD products and acquired three companies during the year to enhance its SSD product offerings. The acquisitions included SSD manufacturer sTec, enterprise flash storage company Virident Systems and storage optimization software company Velobit. Consequently, the company generated over $480 million from enterprise SSD sales in 2013, up from about $250 million in 2012. The figure further rose to $590 million in 2014 due to a a growing industry-wide adoption of its SSD products. At the end of 2014, the company announced the acquisition of flash storage array maker Skyera in an all cash transaction, which should further help the company expand its presence in the growing SSD market.

In its latest earnings release, Western Digital management mentioned that the enterprise SSD market is expected to grow at 40% this year, while it expects its enterprise SSD sales to outpace the industry average. [3] As a result, we can expect SSD revenues in excess of $820 million for the full year. According to our estimates, Western Digital’s average selling price (ASP) per enterprise storage unit stood at about $146 per unit in 2014. The growing mix of SSD storage should contribute positively to the ASP per storage unit going forward. As a result, we currently forecast the average selling price per unit to rise to about $165 per unit through the end of our forecast period. You can modify the interactive charts below to gauge the impact changes in the price per storage unit for the company’s enterprise storage division will have on our price estimate for company.

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Notes:
  1. Global Enterprise Storage Market 2015-2019, ReportsnReports, January 2015 []
  2. Western Digital Q1’14 Earnings Call Transcript, Seeking Alpha, October 2013 []
  3. Western Digital Q2’15 Earnings Call Transcript, Seeking Alpha, January 2015 []