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Seagate or Western Digital: Which is the Better Stock?

WDC STX MRVL NVDA

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The ever-evolving technology sector has been seeing a number of new trends over the past couple of years. Of these, the notable ones include cloud computing, Big Data, Bring Your Own Device (BYOD), Internet of Things (IoT), flash storage, social networking and 3D printing.

The storage market is a flourishing part of the technology space and has been gaining momentum in the recent years with expanding storage needs and more options to address those needs. Since the market is dominated by a few large players, it makes sense to weigh the pros and cons before investing. In this article, we will provide a brief industry background before diving into the details.

Digging into the Details

A number of factors are driving the market today. These include increased digitization of workloads, the move toward cloud computing, the shift toward mobile computing that necessitates cloud storage, and growing volumes of unstructured data from social networking and other sites that are extremely valuable for online retailers and marketers.

Big Data has been one of the biggest buzzwords in the technology sector in 2016. The term refers to management of vast quantities of unstructured data, i.e. information available from messaging, emails, open source surveys and many other sources.

Storage of unstructured data has become a major problem these days. Big Data storage includes the ability to handle capacity and provide low latency for analytics work. Flash memory is gaining ground against traditional hard drives in this environment due to significant performance advantage and low power consumption.

Moreover, usage of flash in cloud storage that involves pooling of shared resources is increasingly gaining popularity. Simultaneously, the demand for analytics solutions that can analyze this vast unstructured data and unlock its value has increased in recent times.
 
The storage market is seeing a steady increase in demand, given fast-growing stored data volume, especially the explosive growth of unstructured data. NAND (nonvolatile storage technology) demand is expected to remain very strong again this year. Solid State Drive (SSD) demand will also increase and could even surpass manufacturing capacity, leading to periodic shortage and higher pricing in the near term.

Storage Market Trends to Watch For

According to market research firm IDC, revenues from Big Data and business analytics applications is expected to grow from $122 million in 2015 to more than $187 million in 2019  (up more than 50%).

Another research firm, Research and Markets projects worldwide data center storage market to grow at a four-year compound annual growth rate (CAGR) of 15.01% during the period 2016-2020.

Also, TechNavio projected that enterprise SSD market will grow at a CAGR of 17% during 2016–2020. The SSD segment’s growth potential is a major positive for storage stocks because this could offset the losses incurred due to the secular decline in the PC market, which does not necessarily use SSDs.

We see the growth trend in storage and particularly, SSD to be especially beneficial for companies like Seagate Technology plc (STX - Free Report) and Western Digital Corporation (WDC - Free Report) , which have based their products in the SSD storage market.

Seagate or Western Digital?

Seagate and Western Digital are the two big players within the storage space. Seagate is the second-largest manufacturer of hard disk drives (HDDs) in the U.S. The company offers a portfolio of solid state drives and solid state hybrid drives. It also offers a range of disk drive products for the enterprise, client compute and client non-compute market applications. The company provides data storage services for businesses, including online backup, data protection and recovery solutions.

On the other hand, we have Western Digital, which is one of the largest HDD producers in the U.S. The company designs, develops, manufactures and markets a broad range of HDDs used in desktop PCs, servers, network-attached storage devices, video game consoles, digital video recorders and a host of other consumer electronic devices. By completing the acquisition of SanDisk during the fourth quarter of fiscal 2016, the company has been able to venture into the flash drive storage technology space.

For numerous years, these two companies have battled each other for market share and brand recognition in every conceivable way.

Western Digital Looks Good

Western Digital, a Zacks Rank #1 (Strong Buy) technology stock, has generated a strong three months return of around 32.6%. The company has a market cap of $17.39 billion.

The stock has delivered three positive earnings surprises in the last four quarters with an average beat of 5.87%. Moreover, over the last 60 days, six out of eight estimates for fiscal 2017 were raised upward, pushing the Zacks Consensus Estimate up by 19.7% (up 9 cents) to $5.48.

It is worth mentioning that the acquisition of SanDisk has opened new avenues of growth for Western Digital and will help it to gain market traction in SSD. The merger will lead to economies of scale, lower costs, increased market reach and acquisition of new technologies, among other synergies.

Going forward, we believe that the shift toward non-PC applications, secular growth of digital data and growing exposure to the small and medium business space are the long-term positives.

Notably, the company is the largest U.S. manufacturer of HDDs with a 44% market share.

Seagate Not Far Behind
 
Seagate, on the other hand, also carrying a Zacks Rank #1, focuses more on the enterprise side, which is the key growth area in the information technology sector.

Seagate has generated a return of 24.9% over the last three months. The company has a market cap of $11.57 billion.

Over the last 60 days, 12 out of 13 estimates for fiscal 2017 were raised upward, pushing the Zacks Consensus Estimate up 24.2% (up 73 cents) to $3.75.

Nonetheless, the recent merger between Western Digital and SanDisk has made it more challenging for Seagate to capture market share in the SSD technology. Western Digital and SanDisk will be able to offer competitive solutions in cloud-based computing, which has overtaken digital storage solution space over the past couple of years. Therefore, it will be difficult for Seagate to remain competitive in the storage business.

Notably, Seagate is the second largest manufacturer (after Western Digital) of HDDs with a 40% share.

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Conclusion

We believe that both the stocks have their share of pros and cons. But given the current scenario, we would bet on Western Digital because it is well-positioned to outpace the industry and is fundamentally strong enough to withstand risks.

Other Stocks to Consider

Investors may consider other stocks like Marvell Technology Group Ltd. (MRVL - Free Report) and NVIDIA Corporation (NVDA - Free Report) , both of which sport a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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