Obviously the DD makers are under margin pressure, however a case can be made that WDC is going to feel it the worst due to their (1) low-end mix, (2) TFI vs MR orientation, and (3) lack of alternative revenue streams.
Quite often, Wall Street uses a broad brush in painting sectors. Try as they might, QNTM cannot really get their DLT business fairly valued, nor can SEG get their software business counted. In the case of QNTM, several valuation methods will allow you to surmise that their disk drive business is currently trading at $0 per share and even with that, their DLT business is trading at a discount with $24/share. Obviously there is a margin squeeze, but QNTM is also more located at the top-end of the drive market and is currently implementing steps to stop the enterprise-level red ink through restructuring (using a common architecture). Add to this QNTM's investment in TeraStor and their NFR license as well as the closet business in sold-state drives which might get more consideration with the Network Computer moves.
So in general, yes ... disk drive manufacturing is in a bad part of the cycle. But as usual, the stock prices have gone to one end of the extreme and totally discounted reasonable valuations. One simple statistic: QNTM will probably get over 50% of their profits from DLT which is growing (conservatively) at 50% annually (and was growing 100% from last year). So when people talk about the "disk drive stocks", I think they are missing the trees for the forest.
I really missed the boat in shorting WDC as a hedge on my QNTM shares. I think this is because I really like WDC ... I made a lot of money on the run-up to $50 and I think their management is top-rate. That said, though, I think WDC is in a totally different situation from QNTM and even SEG. They are not nearly as diversified and when the estimates start bringing FY earnings to $0.30, that means they will likely have loses as they transition quickly to MR.
Given that, why pay just $5 less for WDC than QNTM when the latter has a real cash cow? I expect to see a divergence of WDC stock price from QNTM and even SEG. I'm not saying WDC will still drop in price, but I think the upside is limited because their revenue stream is under attack more than QNTM or SEG.
-Bill |
