Acquisitions Helped Double Western Digital’s Stock Price In 2013

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Leading hard drive manufacturer Western Digital Corporation (NASDAQ: WDC) had a strong 2013, with its stock price rising from $41 at the start of the year to around $84 at the end of the year. The company gained value during the course of the year on the back of multiple acquisitions leading to a better solid state drive (SSD) portfolio and constantly increasing high-margin SSD sales. Despite stagnating sales of PC and laptop units, WDC had positive news from enterprise and client SSDs.

After Western Digital’s major $4.8 billion acquisition of HGST in 2012, WDC looked to diversify its offerings and move ahead from its core competency of laptop and PC hard disks. We have revised our price estimate to about $80, accounting for the growth in enterprise and SSD units expected going forward. Below we take a look at major acquisitions of SSD manufacturers by WDC  in 2013.See our full analysis on WDC here

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 traditional hard disk drives.

According to a MarketsAndMarkets report, cloud storage was nearly a $5.6 billion market in 2012, and is likely to grow at a CAGR of 40% from 2013 through 2018. [1] As more data moves to the cloud, servers at data-centers will need to support higher input/output operations per second (IOPS) to enhance performance. SSDs provide up to 30-250 times more IOPS than a conventional HDD and therefore stand to benefit from the growing aforementioned speed requirements.

Acquisitions By Western Digital

  1. WDC owned Hitachi Global Storage Technology (HGST) acquired SSD manufacturer sTec in June for $340 million. In addition to the SAS and Fibre Channel SSD drives which both HGST and sTec manufacture, sTec also brought SATA SSD and the faster PCIe SSD product line to the table. [2] With increasing demand for fast access drives, the use of PCIe SSDs in the servers is growing at a high rate. The sTec acquisition fit well with Hitachi’s enterprise flash product portfolio, as it gave the latter ready access to its PCIe SSDs and an entry into the server flash market. Further, sTec’s vast intellectual assets with over 100 SSD-related patents made Western Digital more independent since HGST had a joint-operation with Intel for SSD controllers. [3]
  2. In September, Western Digital acquired Enterprise Flash and SSD Storage manufacturer, Virident Systems, for $685 million. This deal also meant that the company gained a greater presence in the growing enterprise SSD segment. [4] Prior to the acquisition, Western Digital’s major competitor Seagate Technology (NASDAQ:STX) had a $40 million stake in Virident and provided an OEM channel to sell Virident’s PCIe cards. WDC made it clear in its conference call that it wasn’t the only company interested in acquiring Virident and it is quite possible that Seagate was the other interested party. This makes the acquisition doubly important. [5]
  3. The company announced the acquisition of storage I/O optimization software company, Velobit, to further bolster its growth in the SSD segment. The software made by Velobit enhances performance of solid state drives, specifically the enterprise SSDs. By combining the improved SSD offerings with Velobit software, WDC aimed for better performance of its enterprise storage units (see Western Digital Gets Aggressive In Enterprise SSD Space).

Looking Forward To 2014

Amid declining PC and laptop units, the company is looking ahead towards generating revenues from enterprise SSDs. SSDs have higher margins than traditional hard drives, and an increased mix of SSD sales is bound to generate improved profits for the company going forward. However, the company’s margins could be slightly offset by the new cost-effective products that might capture the growing market. For instance, if the newly launched Helium drives are extensively used in data centers instead of pure SSDs, it could pressure WDC’s margins in the coming year.

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Notes:
  1. Cloud Storage Market Worth $47 Billion By 2018, Storage Newsletter, December 2012 []
  2. WDC Acquired sTec  SSD Technology PCIe Cards, TechTarget, June 2013 []
  3. Western Digital Acquires sTec, Network Computing, July 2013 []
  4. WDC BuysFast Growing Virident For $685 million, Forbes, September 2013 []
  5. Western Digital Buys Flash Memory Maker Virident, Thomson Reuters, September 2013 []
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