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To All:
Ripped this off the Value Investing thread. Very interesting.
From: Stewart H. Whitman Monday, Dec 8 1997 5:54PM EST
Michael,
Let me list my four concerns about QNTM/DD makers:
1. In my opinion, the margins on the DLT drives could eventually be
under pressure. Here is some pricing information on Seagate's AIT tape
drive (a Sony design):
uvision.com
And here's the price of a comparable DLT tape drive from Quantum:
uvision.com
As I said before, there are good/bad points for each type of drive, but the Quantum is priced considerably higher, and after some research, I believe the AIT drive to be technically a better choice for most enterprises. I will take back what I said previously about the DLT drives perhaps not being able to grow to higher capacities. I learned that this is not true.
That said, organizations already using DLT will not simply abandon the
technology (for backward-compatability reasons). And it will also take
some time before vendors to make tape libraries incorporating AIT drives and for AIT to become popular. But, I still have to question the ability to sustain the high margins on DLT.
2. I see the possiblity that the drive makers have been doing some
channel stuffing. Perhaps not Quantum or Seagate, but I am almost
certain that WDC has done it (admittedly a rough estimate: 25%
year-over-year revenue growth in recent quarter, and an
empirically-derived 20% drop in entry-level drive prices would suggest
over 50% unit growth - which seems high). My question is, do any of
these companies have policies about inventory levels, etc.? Or do any of them reveal information about unit sales? Or can you tell this
information from their reports?
If this was so, it would almost certainly have a short-term (6 month).
But it could also have a medium-term (6 month - 2 year) effect. For
example, consumers would probably no longer willing to pay higher prices
for drives.
3. What I feel is a poor longer term (e.g. 2-5 year) outlook, which we
have discussed previously.
4. Finally, I don't see the disk drive makers trading at an
exceptionally low valuations relative to historical numbers. Compared to
their 1994 lows, SEG and QNTM are arguably about 1 1/2 times as
expensive (in terms of P/B, P/S) and WDC is about 1 1/4 times.
Certainly, they are well off this year's highs, but the businesses are
not exceptionally cheap.
All in all, I don't question that there is potential for appreciation,
but I question the short- and long-term downside.
Stew
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