Why Did David Einhorn Bet on Seagate? $STX $GLRE $MCD $WDC

David Einhorn and his Greenlight Capital (GLRE) fund opened up a medium-sized long position in technology company Seagate (STX) this past quarter. Since Seagate makes hard drives, and hard drives are seemingly on their way out of favor, observers and other investors have to wonder: what is Einhorn up to this time?

GREENLIGHT CAPITAL

The answer may lie in what Seagate has been doing with its competitors, specifically Samsung. In mid-April, Seagate announced plans to buy the Samsung hard disk drive business, consolidating one key market component into one larger company. The deal, which was worth $1.375 billion in cash and stock, makes Samsung a nearly 10% owner in Seagate, and opens up a series of potential products going forward.

Actually, we don’t need to guess as to the two companies motives in merging. They announced in April their goals, stating in a press release, “The primary objective of our new relationship anchored by these agreements is to enable both companies to better align their current and future product development efforts and roadmaps, accelerate time-to-market for new products and position the companies to better address rapidly evolving opportunities in a variety of markets including mobile computing, cloud computing and solid state storage.”

It’s the last bit that caught my attention, as “mobile computing, cloud computing and solid state storage” represent the three main competitors to hard drive storage. It’s a bit like McDonald’s (MCD) buying a salad shop on the grounds that it may want to expand into edible, healthy food.

That’s wonderful and makes for interesting public relations, but it flies in the face of the rest of the entire business model. It’s like the mafia suddenly deciding to stop pimping out women and selling heroin and instead open up a battered women’s shelter and a legitimate pharmacy. Could they be profitable? Sure. But how much sense does that make?

Cloud computing has been the buzzword for the last year now, and makes on-site, hard storage somewhat obsolete. It appears to be where the marketplace is going. Tablets are also the great growth area for computers, and they’re based on flash memory, rather than a hard drive. (Hard drives would get abused and destroyed in a tablet.)

It’s not entirely clear where the hard drive market is going in the medium term, let alone the long term. They may need to re-engineer the entire business model and some companies may get gobbled up along the way — and not just the Samsungs of the world, who have the means to buy in to partnerships rather than get outright raided.

This is not, of course, the only merger going on in the hard drive marketplace. Western Digital (WDC) bought up Hitachi’s (HIT) storage device unit, leaving only three major players in the hard drive market: Western Digital, Toshiba (TOSBF), and the Samsung/Seagate merger.

While three competitors is better than five, it still does not answer the question of “Why Seagate? and “Why now?”.

Western Digital is clearly the bigger dog in this fight, with a market cap of nearly 9 billion. Seagate comes in around 7.25 billion. Western has a higher EPS, and better results for just about every earnings ratio: Net profit margin, operating margin, ROA, and so on. Yet, Einhorn and Greenlight have opened up a pretty significant position. So, what gives?

It’s worth noting that Einhorn seems to have a nose for knowing what is going to happen next. He called Lehman before Lehman collapsed, after all. Despite taking a lot of heat for it at the time, he was right.

He’s also now a minority owner of the New York Mets, who on that fact alone probably jumped out as the early favorites to be the kings of New York, if not the 2014 World Series champions

At least now, when they do win, he knows where to go to store the memories: Seagate.

This article is originally published at Benzinga.

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