re: WDC
WDC fell 15% this week because the flood in Thailand has severely interrupted its manufacturing. I know WDC was discussed on and off on this thread. It's now getting interesting on a contrarian basis.
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I used to think HDD was crap business and was perpetually in price war. But I was shocked when I checked WDC's ROE in the last 10 years. It has been in the range of 14-40%. Now the HDD economics is getting even better this year when Seagate is acquiring Samsung's HDD business and Western Digital is acquiring Hitachi's HDD business. So 5 vendors become 3 and it is now effectively a duopoly between STX and WDC, together commanding 90% of the market. And come to think about it, its economics is actually better than things like PC, CPU and OS. Every 3-4 years, you may not want to upgrade your OS, PC or CPU. But you HAVE to replace your HDD even if you have no intention to upgrade anything or increase storage volume, because it wears out. It is a recurring business.
The most obvious threat is SSD. SSD's advantage is in its speed, physical reliability and low power consumption. SSD is at the moment 5-10x more expensive than HDD. History tells us their prices will fall in tandem exponentially with HDD prices. On a per GB basis, there will always be a price gap between SSD and HDD. At some point, SSD will be cheap enough for some applications which won't need forever increasing storage. This includes: mobile devices and the cache tier in enterprise infrastructure. On the other hand, desktop systems (think your forever growing video collection and size of the apps) and enterprise data centers (think cloud services) all require forever growing storage. So, HDD is here to stay, at least for a decade.
Between WDC and STX, I prefer WDC because the mgmt appears to be more conservative. Far less debt. Didn't jump right into the SSD fad.
Now WDC is facing headwind at 3 different levels: (1) recession; (2) SSD worry; (3) flood. I read the script of their conference call last night. The impact of the flood sounds really gloomy. Damage to machinery is still unknown. Next 2 quarters will be in red. It sounds like it'll take them a year or so to get back to normal operation.
As far as I can see, if the interruption doesn't damage their relationship with their clients, the headwinds are all temporary. It sounds like a perfect storm which will create tremendous buying opportunities.
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I'll need to switch gear to study its books now...
Can someone tell me I shouldn't waste my time? |
