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Computer Storage Devices Industry Outlook Appears Dim

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The Zacks Computer-Storage Devices industry comprises companies that design, develop, manufacture and market a broad range of hard disk drives (HDDs) utilized in desktop PCs, servers, network-attached storage devices, video game consoles, digital video recorders and a host of other consumer electronic devices.

Some of the industry participants also provide software-defined all-flash solutions that are uniquely fast and cloud capable. There are others that offer high-performance memory subsystems and enterprise storage and data management software, and hardware products and services.

Let’s take a look at the industry’s three major themes:

  • The industry is benefiting from increasing utilization of high-storage mobile devices. Widespread use of streaming media, cloud storage solutions, cloud-based apps, data virtualization and other data-intensive activities have put the industry on growth trajectory. Notably, the industry players are well poised for growth on the back of rapid increase in the amount of data, complexity of data formats and the need to scale resources at regular intervals. Extensive implementation of CRM solutions; increased Internet usage; and rapidly growing media and regulatory compliance have resulted in data explosion for enterprises. This in turn has bolstered the deployment of high-capacity mass storage products, which is a positive. Notably, effective storage is essential for proper harnessing of data.
     
  • Reviving PC market scenario should provide a boost to the industry’s top line. That’s because PCs remain the biggest user of HDDs and the industry participants still derive bulk of their revenues from these devices. Per Gartner’s preliminary data, PC shipments in the second quarter 2019, improving 1.5% year over year to 63 million units. According to the IDC report, shipment rose 4.7% on a year-over-year basis and totaled 64.9 million in the period under review. An improving trend in PC shipments favors business prospects of Seagate, which continues to depend substantially on PC sales.
     
  • However, the Computer – Storage Devices industry is facing challenges owing to NAND flash pricing, which is currently on the decline on account of oversupply and weaker-than-expected growth in end-market demand. Consequently, decline in prices is impacting revenues and margins of players in the space, somewhat negating benefits from improved demand and prices for DRAM products.

Zacks Industry Rank Indicates Cloudy Prospects

The Zacks Computer – Storage Devices industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #217, which places it at the bottom 15% of 256 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined 52.6%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Computer-Storage Devices industry has underperformed the broader sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 29.7% over this period against the S&P 500’s rally of 0.4% and the broader sector’s decline of 2.2%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing computer storage devices companies, we see that the industry is currently trading at 13.48X compared with the S&P 500’s 17.71X. It is also below the sector’s forward-12-month P/E of 20.76X.

Over the past five years, the industry has traded as high as 18.67X and as low as 7.80X, with median being at 12.49X, as the chart below shows.

Price-to-Earnings (P/E) Ratio (F1)

Price-to-Earnings (P/E) Ratio (F1)

 

Bottom Line

Robust market adoption of cloud computing, big data, IoT, auto, connected devices, VR and AI will continue to aid revenue growth for the industry participants. However, operational risks, rising construction costs, entitlement delays and failure to fulfill government requirements are likely to remain headwinds.

Currently, none of the stocks in the Zacks Computer Storage Devices industry carry either a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

However, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may take a look at.

Seagate Technology PLC (STX - Free Report) : This hard disc drives, solid state drives and solid state hybrid drives provider has gained 167.9% on a year-to-date basis. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-fiscal EPS has declined 3.6% over the past 30 days.

Price and Consensus: STX

Qumu Corporation (QUMU - Free Report) : This enterprise video solutions provider has gained 70% on a year-to-date basis. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-fiscal EPS has remained unchanged at a loss of 67 cents over the past seven days.

Price and Consensus: QUMU

Western Digital Corporation (WDC - Free Report) : The company designs, develops, manufactures and markets a broad range of HDDs used in desktop PCs, servers, network-attached storage devices. It has gained 49.3% on a year-to-date basis. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-fiscal EPS has decreased 3.4% over the past 30 days.

Price and Consensus: WDC

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