>> At least with regard to the virtual drive companies a lot of the excess has fallen by the wayside.
In ppe terms Qntm has 151 million, MXTR 132, and last qtr WDC finally got down to 156 (which is less than half of what they had in 1998 but still a bit fat relative to revenue).
<<
We have a nice natural experiment going on right now. WDC is gradually coming to break even on their disk assembly operation. In the Dec 99 Q they sold 5.9 M units and lost $66m. This just finished Q they'll lose $20m, but we don't know the unit volume. But it is probably around 6 M. Since prices were steady, it means they reduced costs by approx $7/disk. We don't yet know if that was from overhead or variable cost. And we don't know how much spare capacity WDC still has. From your posts I get the sense that you think they still have significant unused capacity.
The next question is how much is the variable cost of a disk. Probably only Stitch can tell us that. Maybe he is listening.
So regarding WDC, in the Dec Q, they had $560m rev and 5.9m units. That's $95/unit (rev). But they lost $66m, so their cost was $106/unit.
In the March Q, assuming same rev and same units, their cost is down to $99/unit. To break even they need to remove another $4/unit.
To answer your earlier question regarding WDC as an investment. If WDC achieves the same cost reduction in Q2 as Q1, they'll make $4/drive profit. if by the end of the year they get an additional $6/drive in cost or price or mix adjustments, that will be $10/drive in net profit. At 25 million units, that's $250m. At a P/E of 20, that will fetch $5B in market cap, or $30 to $40 per share.
Is this a sure thing? Of course not. But it doesn't seem as outlandish or impossible as some people think.
Wishfully,
-Sarmad |
