What Trends Can Drive Western Digital To $60?

Western Digital Corporation (NASDAQ:WDC), one of the leading providers of electronic data storage products, has also seen its stock rise by more than 25% at one point this year to touch an all-time high of $53.75. Favorable trends for the overall storage sector can be accredited for this broad-based rally in the sector. Increasing demand for rich formats such as HD for media consumption is leading to growth in demand for high capacity disk drive solutions. In addition, the growth in cloud computing demand is boosting high capacity storage demand from enterprises.

Below we take a detailed look at key trends, how Western Digital is addressing them and how this relates to our price estimate of $61.50.

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Enterprise Business To Ride On Demand From Cloud Computing And Remote Storage

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. Further, more businesses are deploying cloud computing environments in an effort to pool resources and cut costs. Currently, hard disk drives (HDD) offer a more cost-efficient alternative to solid state drives (SSD), making them a more suitable option for developing and expanding cloud infrastructures, as capacity matters more than speed. Western Digital is a leader in the enterprise HDD space and already has several high performance products to offer. Further, the storage company is developing new helium filled drives, which once widely launched, are expected to provide it a significant advantage over competitors. These drives consume up to 23% less power while allowing for a nearly 40% jump in capacity.

However, going forward SSD production costs are likely to go down significantly due to an improvement in technology, which should lead to a decline in the average selling price per gigabyte (GB) for SSDs. To keep up with the trend, Western Digital has been focusing on enterprise SSDs. The company acquired Hitachi GST in 2012, which brought a range of enterprise SSD product lines. ^[1] A few days back, HGST announced the industry’s first 12Gb/s SAS SSD. ^[2] Further, HGST is working on the high-end PCI Express (PCIe) SSD product line. Mass storage interfaces like SATA and SAS connect to the host computer through host adapters that in turn connect to the PCIe interface; PCIe SSDs are much faster than SAS SSDs.

PC, Tablet & Laptop Storage: Hybrid And Solid State Drives Are Key to Growth

Most leading laptop manufacturers are offering laptops with a hybrid HDD-SSD primary memory and high-end, high-performance laptops with complete SSD memory. These drives allow for faster data access compared with HDD. However, SSDs are currently much more expensive per GB than HDDs, leading to slow adoption of SSDs as primary memory components. On average, SSDs are at least twice as expensive as regular HDDs and this cost differential is still causing price-conscious customers and enterprises to look at HDDs. Therefore, we expect hybrid SSDs to gain more popularity in the near term as they have performance and size comparable to SSD drives while being relatively cheaper.

However, in the long term SSD will be the key to growth. We estimate that tablet sales will outstrip notebook and netbook sales by the end of our forecast period. Tablet computers use solid state memory chips as their primary storage memory. The increasing popularity of tablet computers will lead to a surge in the SSD space. Further, as discussed previously, SSD costs are expected to come down going forward which should also boost the demand for SSDs.

We believe Western Digital is taking the right steps with its equal focus on SSDs and hybrid storage drives. Its wafer-thin 5mm hybrid drive designed for use in hybrid laptops and ultrabooks gives the company an edge over HDD makers as well as SSD makers. ^[3] Further, the company is continuously working on development of SSDs for retail consumers, which will help it in the long term. This is one reason why we estimate a higher value for its PC, tablet and laptop storage unit over comparable players like Seagate.

Growth In High Definition Digital Content Drives Storage Requirement

The high growth rate of digital content is driving the need for high capacity storage to aggregate, host, distribute, manage, back up 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 their 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 will drive demand for high capacity disk drive solutions in the end-user market.

According to Cisco, global cloud traffic is going to grow at an annual rate of 45% and reach 4.3 zettabytes (1 zettabyte is equal to about 1 quadrillion GB) by 2016, while global data center traffic will grow to 6.6 zettabytes. ^[4] Nearly 20% of this data will be accounted for by online video streaming, email and music. Western Digital is leveraging this end-user content creating phenomenon with value added products such as DVR backups and wireless backup networks. The list also includes media storage devices designed to connect easily with different media sources such as TV’s, radios and gaming consoles.

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1. WD® Completes Acquisition of Hitachi Global Storage Technologies, Western Digital, March 08 2012 [↩]
2. WD’s HGST Unveils World’s First Solid-State Drives with SAS-12Gb/s Interface, X bit Labs, April 08 2013 [↩]
3. Western digital brings wafer thin 5mm hard drives to idf we go, Engadget, Sept 12 2012 [↩]
4. Cisco Global Cloud Index Forecasts Cloud Traffic to Grow Sixfold by 2016, Cisco, Oct 23 2012 [↩]