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Down Memory Lane: Seagate, Western Digital, Micron
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I’ve been thinking for some time about the exact difference between memory and storage in computing systems and of late, I’ve come to the conclusion that the difference isn’t exact. In fact, as we move closer toward cloud adoption for daily business needs, convergence and hyper-convergence technologies will further blur this difference.
Still, for those curious souls like me, it’s worth knowing that storage is a software implementation not included in the computer architecture (i.e. the input/output subsystem) while memory is an integral part of it and implemented by hardware engineers. So convergence of storage with networking and other technology stacks would mean that it is increasingly treated as memory.
With that brief introduction, let’s jump to what’s going on with some of the companies supplying these essential technology building blocks.
Western Digital-Unisplendor Form JV
Western Digital (WDC - Free Report) has joined hands with China’s Unisplendor Corporation in the latest move to boost its storage business. The two companies launched a JV where the Chinese company will have a 51% stake with Western Digital retaining the rest.
The JV will be called Unis-WDC Storage Co., Ltd. (UNIS WDC) and will sell WDC storage solutions to support China’s big data requirements. It will also develop its own products and capabilities. Unisplendor’s goal seems to be to standardize on WDC technology for starters and then wean itself off this dependence on WDC technology once internal capabilities have been built up.
This is certainly in line with the goals of Unisplendor’s parent Unigroup, which is building China’s capabilities in semiconductors, mobile interconnect, cloud computing and cloud services. While it isn’t perfect as far as deals go, it’s fantastic as far as what is currently on the table with respect to China.
Separately, WDC CEO Steve Mulligan warned against China’s emerging chip industry, which could suddenly increase chip supply and thereby hurt prices and destroy profits of not just international but also Chinese suppliers. But Chinese decision makers are unlikely to pay attention as research data from multiple firms show that China’s internal chip demand continues to grow and the gap between internally sourced and imported chips continues to widen. Moreover, China can enforce internal consumption by passing suitable laws at the cost of international suppliers when it is in a position to make enough.
While Western Digital has taken all the necessary steps to prepare for the changing market conditions favoring flash technology use in the data center, its chief hard disk drive (HDD) competitor Seagate (STX - Free Report) has pretty much stagnated. Unlike WDC, Seagate has neither raised cash by issuing debt, nor used it like WDC to buy out a major flash player such as SanDisk. Nor has it any major deal afoot (as far as I can tell) like WDC’s deal with Unisplendor. What it has been doing instead is buying back stock and paying dividends, a classic sign that the company lacks a good growth plan that it can invest in.
If the market it played in was mature, these measures would have been understandable to keep showing acceptable earnings numbers, but there is plenty of growth opportunity in storage/memory particularly with the advent of cloud computing that the company doesn’t seem capable of tapping.
And that’s why it comes as no surprise that STX has approached activist investor ValueAct to help it determine strategic alternatives. Together the two are purchasing 12.5 million Seagate shares in a block transaction. Value Act is getting the largest chunk of this (9.5 million shares, or 4% of the company) to become one of the largest shareholders. It has also been welcomed as observer to Seagate’s board.
Micron Preannouncement (Full Earnings Report On Oct 4)
Without going into detail, Micron (MU - Free Report) management said at the Citi 2016 Global Technology Conference that the company’s fiscal fourth quarter revenue would come in at or above the high end of guidance ($2.9-3.2 billion), which will also be reflected in the gross margin. This was attributed to the completion of key mobile qualifications, stable to rising ASPs, stabilization in the PC market against the backdrop of lean channel and OEM inventories.
The strengthening ASPs are obviously on account of tighter supply and that situation is not expected to change through the end of the year. In fact contract pricing may be expected to increase by leveraging the higher spot prices. Since memory chips are largely commodity-type, spot prices vary widely depending on the supply. But contract prices prevail for the period of the contract so the ability to sign them at higher prices is a positive.
Micron also put forward the company’s capex plans for 2017, which are at $4.8-5.2 billion. Around 40% of this will be spent on DRAM, 40% on non volatile memory including 3D NAND and the 3D XPoint technology that it developed along with Intel (INTC - Free Report) , and the balance going for regular enablement.
An encouraging trend for Micron is the expected bit crossover to 3D NAND in the fall of this year and 60% 3D bits by year-end. But NAND costs will increase 20-25% in 2017 as the company gets into the higher-margin enterprise storage business. Management expects this to be a net positive to margins. On the DRAM side, the company is on track to deliver cost savings of 20-25% in 2017.
To be fair, the HDD market hasn’t been a dream for any company in recent times and enterprise storage trends are just part of the story. The truth is, solid state drives (SSDs) continue to encroach on the HDD market traditionally dominated by STX and WDC. So both these companies are required to beat the trend or fall prey to it. The shrinking of the PC market especially in emerging markets has made matters worse because PCs are the largest HDD consumers.
That said, it’s encouraging that both IDC and Gartner estimate that the PC market in North America returned to growth in the second quarter and that there are signs of improving PC market conditions in the second half of the year followed by slight growth in 2017.
So it’s a period of transition for storage players in a market that promises both dangers and opportunities. The one/s making the most of the situation will surely emerge as winners.
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Down Memory Lane: Seagate, Western Digital, Micron
I’ve been thinking for some time about the exact difference between memory and storage in computing systems and of late, I’ve come to the conclusion that the difference isn’t exact. In fact, as we move closer toward cloud adoption for daily business needs, convergence and hyper-convergence technologies will further blur this difference.
Still, for those curious souls like me, it’s worth knowing that storage is a software implementation not included in the computer architecture (i.e. the input/output subsystem) while memory is an integral part of it and implemented by hardware engineers. So convergence of storage with networking and other technology stacks would mean that it is increasingly treated as memory.
With that brief introduction, let’s jump to what’s going on with some of the companies supplying these essential technology building blocks.
Western Digital-Unisplendor Form JV
Western Digital (WDC - Free Report) has joined hands with China’s Unisplendor Corporation in the latest move to boost its storage business. The two companies launched a JV where the Chinese company will have a 51% stake with Western Digital retaining the rest.
The JV will be called Unis-WDC Storage Co., Ltd. (UNIS WDC) and will sell WDC storage solutions to support China’s big data requirements. It will also develop its own products and capabilities. Unisplendor’s goal seems to be to standardize on WDC technology for starters and then wean itself off this dependence on WDC technology once internal capabilities have been built up.
This is certainly in line with the goals of Unisplendor’s parent Unigroup, which is building China’s capabilities in semiconductors, mobile interconnect, cloud computing and cloud services. While it isn’t perfect as far as deals go, it’s fantastic as far as what is currently on the table with respect to China.
Separately, WDC CEO Steve Mulligan warned against China’s emerging chip industry, which could suddenly increase chip supply and thereby hurt prices and destroy profits of not just international but also Chinese suppliers. But Chinese decision makers are unlikely to pay attention as research data from multiple firms show that China’s internal chip demand continues to grow and the gap between internally sourced and imported chips continues to widen. Moreover, China can enforce internal consumption by passing suitable laws at the cost of international suppliers when it is in a position to make enough.
Western Digital has a Zacks Rank #3 (Hold).
WESTERN DIGITAL Price
WESTERN DIGITAL Price | WESTERN DIGITAL Quote
Activist Investor Stake In Seagate
While Western Digital has taken all the necessary steps to prepare for the changing market conditions favoring flash technology use in the data center, its chief hard disk drive (HDD) competitor Seagate (STX - Free Report) has pretty much stagnated. Unlike WDC, Seagate has neither raised cash by issuing debt, nor used it like WDC to buy out a major flash player such as SanDisk. Nor has it any major deal afoot (as far as I can tell) like WDC’s deal with Unisplendor. What it has been doing instead is buying back stock and paying dividends, a classic sign that the company lacks a good growth plan that it can invest in.
If the market it played in was mature, these measures would have been understandable to keep showing acceptable earnings numbers, but there is plenty of growth opportunity in storage/memory particularly with the advent of cloud computing that the company doesn’t seem capable of tapping.
And that’s why it comes as no surprise that STX has approached activist investor ValueAct to help it determine strategic alternatives. Together the two are purchasing 12.5 million Seagate shares in a block transaction. Value Act is getting the largest chunk of this (9.5 million shares, or 4% of the company) to become one of the largest shareholders. It has also been welcomed as observer to Seagate’s board.
Seagate has a Zacks Rank #2 (Buy).
SEAGATE TECH Price
SEAGATE TECH Price | SEAGATE TECH Quote
Micron Preannouncement (Full Earnings Report On Oct 4)
Without going into detail, Micron (MU - Free Report) management said at the Citi 2016 Global Technology Conference that the company’s fiscal fourth quarter revenue would come in at or above the high end of guidance ($2.9-3.2 billion), which will also be reflected in the gross margin. This was attributed to the completion of key mobile qualifications, stable to rising ASPs, stabilization in the PC market against the backdrop of lean channel and OEM inventories.
The strengthening ASPs are obviously on account of tighter supply and that situation is not expected to change through the end of the year. In fact contract pricing may be expected to increase by leveraging the higher spot prices. Since memory chips are largely commodity-type, spot prices vary widely depending on the supply. But contract prices prevail for the period of the contract so the ability to sign them at higher prices is a positive.
Micron also put forward the company’s capex plans for 2017, which are at $4.8-5.2 billion. Around 40% of this will be spent on DRAM, 40% on non volatile memory including 3D NAND and the 3D XPoint technology that it developed along with Intel (INTC - Free Report) , and the balance going for regular enablement.
An encouraging trend for Micron is the expected bit crossover to 3D NAND in the fall of this year and 60% 3D bits by year-end. But NAND costs will increase 20-25% in 2017 as the company gets into the higher-margin enterprise storage business. Management expects this to be a net positive to margins. On the DRAM side, the company is on track to deliver cost savings of 20-25% in 2017.
Micron shares carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
MICRON TECH Price
MICRON TECH Price | MICRON TECH Quote
Summing Up
To be fair, the HDD market hasn’t been a dream for any company in recent times and enterprise storage trends are just part of the story. The truth is, solid state drives (SSDs) continue to encroach on the HDD market traditionally dominated by STX and WDC. So both these companies are required to beat the trend or fall prey to it. The shrinking of the PC market especially in emerging markets has made matters worse because PCs are the largest HDD consumers.
That said, it’s encouraging that both IDC and Gartner estimate that the PC market in North America returned to growth in the second quarter and that there are signs of improving PC market conditions in the second half of the year followed by slight growth in 2017.
So it’s a period of transition for storage players in a market that promises both dangers and opportunities. The one/s making the most of the situation will surely emerge as winners.
Zacks' Best Investment Ideas for Long-Term Profit
Today you can gain access to long-term trades with double and triple-digit profit potential rarely available to the public. Starting now, you can look inside our stocks under $10, home run and value stock portfolios, plus more. Want a peek at this private information? Click here >>