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Western Digital Continues Acquisition Spree with Tegile Buy

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Western Digital Corporation (WDC - Free Report) has been on an acquisition spree lately. Post the company’s buyout of Upthere, an app-based cloud-storage startup, yesterday, this hard disk drive (HDD) producer is set for another strategic acquisition.

Western Digital signed an agreement to acquire Tegile Systems (“Tegile”) for an undisclosed amount. The company will integrate Tegile into its Data Center Systems (DCS) business unit. The acquisition deal is anticipated to close in the week of Sep 4, 2017, subject to customary closing conditions.

California-based Tegile offers flash-driven storage arrays for database, virtualized server and virtual desktop environments. Tegile IntelliFlash storage arrays provide comprehensive data protection, with support for network attached storage (NAS) and storage area network (SAN) connectivity.

Synergies from the Deal

The acquisition is believed to be in sync with the company’s strategy to push itself further in to the enterprise cloud-based storage space. Apart from, expanding the flash- based product portfolio, the acquisition will fetch over 1,700 new customers to Western Digital.

The company’s efforts toward expanding footprint in the flash storage are commendable as its development of the 96-layer 3-D NAND flash technology debuted in June. Consequently, this deal will strengthen its foothold in this space and should prove valuable.

Notably, this deal comes at the time when the storage reportedly on the verge of acquiring Toshiba’s flash memory chip business. The common link in the aforementioned acquisitions is that all these companies provide cloud based flash-driven storage solutions which are growing rapidly.

The demand for flash-storage has increased immensely in recent times due to exploding volumes of data. The need for storing this data as well as fast access is significant for Big Data and business analytics applications. According to market research firm IDC, revenues from these applications are expected to grow from $122 million in 2015 to over $187 million in 2019 (up more than 50%).

Hence, the rising demand for flash storage bodes well for Western Digital, which is taking the inorganic route to bolster flash storage offerings.

Moreover, per Research and Markets projections, worldwide data center storage market will expand at a four-year compound annual growth rate (CAGR) of 15.01% during 2016-2020. Thus, the acquisition is a prudent move as it will help Western Digital strengthen its storage portfolio and increase market share.

Acquisitions: Key Catalyst for Western Digital

Over the years, Western Digital has focused on acquisitions to expand total addressable market (TAM) and solidify footprint in growth markets. The acquisition of SanDisk has opened new avenues of growth for the company, particularly in the NAND and SSD markets.

The acquisitions of Amplidata, sTec, Velobit, Inc., Arkeia Software Solutions and Virident Systems have not only reinforced Western Digital’s small-to-medium sized business solutions but also expanded its SSD product portfolio.

Bottom line

Western Digital stock has gained 32.6% year to date, substantially outperforming the 12.2% rally of the industry it belongs to.

We believe that the acquisition strengthens Western Digital’s position in the storage market, especially compared to peers Seagate Technology (STX - Free Report) .

We believe that the shift toward non-PC applications, secular growth of digital data and increasing exposure to the small and medium business space are the long-term positives for Western Digital. The company’s growing footprint in the automotive as well as the connected home and industrial categories is a significant positive, in our view.

We remain encouraged by the company’s launch of a string of storage devices under the mobile and cloud segment. Further, Western Digital’s entry into the wireless devices market comes at a time when storage services related to smartphones and tablets are witnessing large-scale adoption. These factors are anticipated to be growth catalysts, going forward.

Zacks Rank & Key Picks

Western Digital currently carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector are NVIDIA Corporation (NVDA - Free Report) and Applied Optoelectronics (AAOI - Free Report) . Both the companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA and Applied Optoelectronics has a long-term expected EPS growth rate of 10.3% and 17.5%, respectively.

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