Topic: Computer Storage Devices
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Panelists
Morgan Stanley Dean Witter, from reports by PC/Hardware/Peripherals/Data Storage technology analyst, Gillian Munson.
Bill Meehan, Chief Market Analyst at Cantor Fitzgerald.
Q&A
Briefing: How fast do you expect the disk drive industry to grow in the next 3-5 years? What major factors are expected to drive this growth?
Gillian Munson:We expect disk drive unit growth to be strong (17% + annually) for the next several years due to growth in multi-disk-drive systems, sales of add-on storage, and solid underlying PC unit growth. Disk drive growth should exceed PC growth. Tape drive and storage software business should also be interesting and could be additive to earnings. In time, we are excited by enterprise storage systems, as IT organizations increasingly centralize storage. Near-term, the HDD-related stocks are prone to volatility. C3Q (calendar quarter) will be back-end loaded, and there could be continued pricing scares related to oversupply.
Bill Meehan: Currently, given the uncertainty surrounding the Asian economic crisis, all bets are off with respect to growth targets.
Briefing: The disk drive industry is experiencing aggressive pricing in the desktop segment and a flat-to-down outlook in the high performance Hard Disk Drive (HDD) market. Which companies will be most impacted by these developments? Which companies currently have the best product mix to lessen the impact?
Gillian Munson: Pricing in the Hard Disk Drive market is becoming more aggressive particularly at the very high end and the very low end of the product range. At the low-end, this aggressive pricing was brought about by a few HDD vendors aggressively moving excess low-end inventory through the channel during the quarter. We are hopeful that this pricing environment will be short-term in nature. We continue to remind ourselves that PC market growth is one of the most important determinators for the health of the HDD business generally. Importantly, our view continues to be that the desktop PC market is strong (18% growth in CY97 and 17% growth in CY98) and that the drivers are in place to fuel a strong CQ4 PC market (and we are checking the PC channel very regularly). We are cautiously optimistic that this will translate into a more normal pricing environment in HDDs. We think that Quantum (QNTM) is well shielded from pricing pressure in HDDs by its DLT tape business (20% of revenue and a far greater portion of profits) and its desktop HDD product positioning which is primarily focused on higher capacity points.
Bill Meehan: The whole group is being hindered by severe pricing pressure and excessive inventory. Further downside risk is quite likely, and we wouldn't get aggressive on any of these stocks until Japan's troubles, and the implications of the Asian slowdown, become more clear. When Seagate broke down through its late October lows, we weren't holding out for any value in the group.
Briefing: Increasingly, technology companies are striving to become single service providers in an effort to serve and maintain their customers better. Do you see this trend taking shape in the disk drive industry? If so, where do you expect these companies to be doing most of their acquiring, and who are the likely candidates?
Bill Meehan: Given the changes in technology that have contributed to the group's weakness, we don't think consolidation in an effort to become single service providers is going to occur at this point.
Briefing: Which companies are you recommending and /or avoiding?
Gillian Munson: On the HDD side, our current favorite isQuantum (QNTM) with an OUTPERFORM rating. We lowered our estimates for Western Digital (WDC) and dropped our rating to NEUTRAL - though we do so with a long-term view and while nervously watching pricing pressure in the industry. Our favorites in the Peripherals/Data Storage segment are Adaptec (ADPT) with an OUTPERFORM, and EMC Corp (EMC) with an OUTPERFORM. Both of these companies enjoy a number of the benefits of positive HDD market trends but avoid the risk associated with the high-volume/low-margin commodity nature of the HDD business.
Bill Meehan: We're avoiding all of the disk drive makers near-term as they are a very volatile and cyclical part of the technology sector, and won't turn on a dime. (B) Moreover, we would be inclined to use any significant bounces as an opportunity to short these stocks. In all, we would suggest treating the group with benign neglect as investments here will probably be dead money for some time.(/B) |
