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A Softer Market for Hard Drives

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One of the most important components of modern-day consumer electronic devices, such as PCs, laptops, notebooks, tablets, pen drives, cameras or iPods often goes unsung. This is because storage capacity is such an essential part of these devices that we practically forget to see it separately as a component.

But this sub-market, if you will, has been evolving too, with manufacturers striving to come out with advanced storage devices to suit varying customer needs.

The computing segment primarily consumes three kinds of storage: internal, external or network attached. Internal storage is generally a hard disk drive (HDD) or solid-state drive (SSD). An SSD refers to a semiconductor-based primary storage medium as opposed to magnetic media such as a hard drive.

External storage devices, such as those attached through USB drives can be easily connected to any computing device to transport or share data between computers. Of course, there are some limitations to sharing in this way, since the device needs to be attached to the computer to enable data transfer or viewing. This is where network attached storage (NAS) enters the picture.

Unlike an external hard drive, an NAS may be connected directly to a router or a hub and is therefore available to all computers within the network at any given time.

Although storage is typically a much more stable market, the sluggish PC market could take a toll on it. The brunt of the softness is likely to be felt in the HDD category, which remains the primary storage component for computers.

But distributors are not too worried, since historically, storage has proved to be the most resilient IT category in a constrained budget environment, much ahead of Software and Servers. At present, there appears to be no fear of oversupply, since channel inventories are pretty lean.

However, given that demand remains extremely soft, there is unlikely to be any pricing support. Top IT distributors Ingram Micro Inc. , Arrow Electronics Inc. (ARW - Free Report) and Avnet Inc. (AVT - Free Report) appear to be banking on demand from the small and medium business (SMB) segment to boost PC sales in the current quarter.

Industry experts are, however, saying that the trend is toward replacement of HDDs with SSD (or flash) drives. These drives are non-volatile (unlike HDDs), shock resistant, high-speed and relatively power efficient. Therefore, despite their higher prices, these drives are liked by many original equipment manufacturers (OEMs).

All major tablets that have been announced or shipped this year use flash chips in place of a spinning hard disk drive for storage. Smartphones also use NAND flash, as do many net books.

Analysts say that the two most prominent rivals in the storage space, Seagate Technologies plc (STX - Free Report) and Western Digital Corp. (WDC - Free Report) will become more meaningful players in the SSD space with the closure of their respective acquisitions.

In April, Seagate acquired Samsung Electronics Co.’s HDD business. The deal will give Seagate access to Samsung's NAND-type flash chips for its solid state drive products. In March, Western Digital entered into an agreement with Hitachi Ltd. to acquire its Global Storage Technologies business.

Seagate has already been dealing with SSD products for several years, but has struggled to gain significant traction. Management believes that the closure of the Samsung deal could serve as a catalyst to get that business moving. But as of now, Western Digital is somewhat unclear as regards the SSD space. Analysts nevertheless have high hopes regarding the company’s efforts in this space, leveraging technologies from the newly acquired unit.

The disk drive market is highly competitive, and has experienced drastic pricing pressure due to supply/demand volatility. In the near future, hard disk companies might be vulnerable to pressures as customers such as tablet PC makers choose flash cards for storage purposes instead of the customary hard disks. The situation may compel companies to cut hard disk prices, which may in turn hurt margins. This will step up consolidation in the market in an effort to alleviate competition.

Currently, Seagate has a Zacks #3 Rank (short-term Hold). However, Western Digital currently hold a Zacks #4 Rank, which implies a Sell rating.

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