Re: Current HDD Sector slump
(I cross posted in WDC thread as well)
Hello all, I am a longtime lurker and would like to share a few thoughts with you, and get yours. The following is a synopsis of what my research has uncovered thus far.
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These are clearly challenging times for the HDD sector, as well as above and below in the value chain.
I recently began exhaustive sector research which includes investigation of the horizontal players that you are of course all familiar with:
WDC QNTM SEG IBM (and the erstwhile CNR and MXTR as well)
As well as the companies immediately below them in the value chain:
APM RDRT HMTT STMD KMAG (and others)
And the companies immediately above them:
GTW DELL MUEI IBM CPQ SNE NIPNY (and others for which info is less readily available, such as Acer and Toshiba)
And the companies immediately above THEM:
CPU CDWC IM MSEL NSIT (and others)
As you can see the HDD business participates in an extremely complex and interwoven web of business relationships. It is my OPINION <g> that only someone that really understands what is going on throughout the entire web of relationships has a better-than-even chance at picking the one or two companies from among all of them that stand to do the best.
The HDD companies are the ones interesting to me today. Most of the other companies I listed above are overvalued (IMHO <G>) and/or have had big runups.
The HDD business is a quasi-commodity business (like many sectors in technology) where demand is primarily price-driven, but there are non-zero switching costs to the OEM customer embodied by qualification procedures. A HDD customer like CPQ for example will tolerate a SMALL, SHORT TERM suboptimal price from a component supplier if CPQ believes that the component supplier will quickly return to competitiveness.
As far as individual franchise value goes, I believe no individual HDD maker has enough to significantly impact the purchasing decision. Ask five people at random what their favorite HDD brand is and you're likely to get five different answers. (OK, OK, the first five people I asked said WDC, WDC, IBM, SEG, QNTM, not in that order <g>)
So if you accept my premise of a quasi-commodity characterization, microeconomic theory asserts that over the LONG run the low cost producer will do the best. IBM has been and just recently unscored their position as the TECHNOLOGY leader but historically they have not been good at manufacturing efficiencies within their sectors of business.
Technology sectors have also been historically subject to EXTREME cyclicality brought on by capacity lag: industries tend to overbuild in response to accelerating demand and vice versa. This is a well known phenomenon (I think!) in other businesses as well e.g. commercial construction.
Right now, the HDD sector is overbuilt, like the DRAM sector. And unfortunately, the extra capacity wont go away. Some of you may have seen a recent Samsung press release indicating a new $200mm HDD facility, out of a $1bb budget for HDDs (!) My theory is that Asian firms like Samsung and Fujitsu, casting about for avenues of growth, were attracted by the bumper years of 94 through 97 for most of the HDD business. Classic micro: the economic "rents" during that period have attracted new entry into the industry.
Bottom line, be prepared for a difficult spell in the sector. If the situation I've outlined does exist then, depending on the amount of overcapacity, some or all of these companies could go in the red soon.
There is a bright side to all this. Astute investors will watch for the signs that demand is nearing capacity and begin accumulating on the upswing of the cycle. I plan to watch what is going on at DELL, CPQ, CDWC, IM for indications.
Some sharp observers have noted that the retail prices of HDD units to end users have stepped off a cliff. I plan to watch those numbers very closely going forward.
It's possible that the market either in recognition of these factors and/or in sheer panic has pushed the sector near the bottom already. But again, the manufacturing capacity is not going away, so we could very well see at least two more quarters of bleeding until either some of the players fold and/or demand catches up.
I think that demand is going to accelerate and I have a framework for that theory but this post is already too long <g>.
I would love to discuss some of the finer points via email with anybody inside the business either on the mfg end or the purch. end.
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May your portfolios be fruitful and your cap gains multiply,
Pierre-X |
