With cloud storage turning into the new star of the digital era, what is the future for hard disk drives (HDD)? I do not like to think that one innovation erases competitors from the picture. I prefer to think that new technologies offer another possibility to accomplish our everyday tasks. So, let’s look into three data storage market leaders: EMC Corporation (NYSE:EMC), Western Digital Corp. (NASDAQ:WDC), and Seagate Technology PLC (NASDAQ:STX).
Turning the wheel
Seagate Technology PLC (NASDAQ:STX) has developed hybrid drives in order to counter the effect of solid state drives (SDD) in ultrabooks and other alternative technologies. The introduction of new products and the upcoming holiday season is expected to return the company to previous performance levels and secure long-term growth.
So far, the market has proven that SDD technology will not eat out of the HDD market because SDD carries a higher price and holds less information. As a result, the future outlook for the company remains positive. Analysts still have a great deal of uncertainty about the industry, however.
Lower shipping volumes due to the flood means bad news for Seagate Technology PLC (NASDAQ:STX), but at the same time it allows for price hikes. It’s also fortunate that no facilities have been damaged. The company continues to buy out smaller and troubled competitors in an effort to increase market share, and it has done so successfully since 1989.
Seagate Technology PLC (NASDAQ:STX) has also started a relationship with Virident Systems that will allow the firm to venture into the peripheral component interconnect express segment. At the same time, it is concentrating on efforts to cater to the enterprise side of the business that offers better future prospects.
Financially, Seagate is very strong. Trading at 7.2 times its earnings (a 56% discount to the industry average) and paying a dividend of $0.38 dividend, the stock is undervalued. It is recommended to buy because the company took decisive steps to develop alternative storage devices like SSD, RAID arrays, and optical drives.
Research issues
Western Digital Corp. (NASDAQ:WDC)´s facilities have suffered from Thailand’s flood as well, which offset demand increases, reduced price leverage, and stronger shipping. Future prospects, however, remain positive thanks to the introduction of new products and strategic acquisitions.
New products have been focused in the SDD and HDD segments, while ongoing research has concentrated on products for large data centers. The company looks to benefit in the long run from the increasing number of data centers, being pushed by cloud-based storage.
Like its main competitor, Seagate, Western Digital Corp. (NASDAQ:WDC) is expected to benefit from a higher demand for desktop and notebooks in the second half of 2013. Benefits are expected to become visible in the long-term as suppliers adjust their inventories.
The most important characteristic for Western Digital Corp. (NASDAQ:WDC)´s long-term growth, however, is the fact that almost half of its revenues originate in the Asian market. Given current market synergies, India and China offer the company a great future outlook.
Western Digital Corp. (NASDAQ:WDC)’s balance sheet is very strong. The company trades at 8.2 times its earnings (a 48% discount to the industry average) and pays $0.25 quarterly dividends. It is recommended to hold until R&D expenses are curbed, customers become more diversified, and Thailand´s assets are fully operational, however.
Acquisition spree
EMC Corporation (NYSE:EMC) is the only company here that has improved revenues, though this was at the cost of its operating margins. Acquisitions and competition have further reduced potential profits as well. For the road ahead, a wide portfolio that serves all segments is expected to guarantee profitability.
EMC Corporation (NYSE:EMC) provides both storage hardware and software. As a result, the firm will no doubt absorb a great part of the market synergy generated by higher demands for data center and cloud-based storage. At the same time, by providing hardware and software the company has risen switching costs, turning into a respectable rival for giants like IBM, HP, and Dell.
In order to further capitalize on market synergies, EMC Corporation (NYSE:EMC) has acquired 17 companies and increased its presence in emerging markets. Such acquisitions have increased potential profits by vertically and horizontally integrating the company, promoting efficiency and lowering its bottom line. The company also started several partnerships.
On the downside, the aggressive acquisition spree has risen some red flags. Its pricing leverage is small given high competition, limiting possibilities for the company’s margin expansion. One example of such a risk is the as-yet unprofitable VCE partnership with Cisco.
EMC Corporation (NYSE:EMC) has a clean balance sheet, and holds the highest operating margin in the industry. The stock currently trades at 21.3 times its earnings, packing a 25% premium to the industry average. It is recommended to hold until recent acquisitions and issues with Cisco are resolved.
Storing it away
Industry competition will continue to stiffen, but the three companies analyzed here have secured large market shares. Future profits will deepen as new products are introduced; this is especially true for Seagate. While Seagate is not the greatest innovator, it has learned to balance research and finances. Additionally, its acquisitions have been measured and are improving the company’s overall performance.
The article Can Profits Be Archived? A Look at Data Storage originally appeared on Fool.com and is written by patricio kehoe.
patricio kehoe has no position in any stocks mentioned. The Motley Fool owns shares of EMC and Western Digital. patricio is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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