GM,
FWIW I agree with Yogi that this is a good time to lay low on RDRT and watch for signs of an improved position. These are very dangerous waters they are navigating IMO. I do not think this company has been as challenged ever. I think their management appointments of late have been laudable. I think the very embryonic signs of recovery in the DD sector are (hold your breath) encouraging. But I think we still will see new lows on RDRT before it gets more clear where they can go. This is a company that desperately needs a major qual on MR product. I would recommend that a play on a DD maker for now is the best available in a recovery scenario with the component makers possibly becoming a secondary play when we determine if we are indeed seeing a light at the end of the tunnel instead of an oncoming freight train.
I understand how your finger would get itchy poised over the button. Cash is boring and I am bored to tears. My broker is sending cards and letters and wonders if I have gone to the competition. I suspect your dog is wondering why you have the glazed look in your eyes. <G> But it is still a very good time to be cautious IMO. To offer a second opinion that I agree with the following are Gillian Munson's (Morgan Stanley) comments after attending an IDC conference last week.
Best,
Stitch
The following reprinted for personal use only:
KEY POINTS
On Monday, May 4, 1998, we attended an International Data Corporation
(IDC) update conference focused on the disk drive, tape drive, and
enterprise storage markets. At the conference, we spent a good deal of
time talking with industry players.
We have no changes to our estimates or investment philosophy in this
area to make at this point. We thought that the conference was a good
review of the industry's issues. Key take-away themes we found
important follow:
- The disk drive market is in a competitive down-cycle and a
rebound could be more gradual than in past cycles.
- Per IDC, the high-end of the HDD market is showing signs of
health but competition remains fierce.
- The emergence of the sub $1,000 PC will put pressure on disk
drive designers.
- The market for tape storage will become increasingly crowded as
new products emerge.
- The enterprise storage opportunity continues to grow at a
monumental rate. Performance is critical in this market.
We maintain our cautious stance on the disk drive industry though we
continue to look for stories with bottom line leverage. For now, we
like the cleanup underway at Seagate (SEG, $29, Outperform, Target
$38) and remain in "wait-and-see" mode with respect to the other
companies in the space. We rate Quantum (QNTM, $25), Western Digital
(WDC, $20), Read-Rite (RDRT, $11), and Stormedia (STMD, $3) Neutral.
The Disk Drive Market is in a Competitive Down-Cycle and a Rebound
Could be More Gradual Than in Past Cycles
Per IDC, although the HDD industry continues to see high levels of
year-to-year organic unit demand fueled by increases in CPU power,
software applications and the Internet, it is currently in a down-
cycle in real shipments (including inventory adjustments) and
profitability.
While 1997 saw rapidly decelerating Y/Y unit growth caused by
oversupply, IDC forecasts call for a reversal in this trend, with a
significant uptick in CQ2:98, and continued growth-rate increases
throughout C2H:98. In avoiding the oversupply problems that the disk
drive industry experienced during 1997, forecasts call for a slowdown
in the rate of acceleration of unit growth in CQ4:98 (although still
showing a modest Y/Y and Q/Q increases). This should lead to a
relatively healthy state within the industry, allowing Seagate and
International Business Machines (IBM, $120, Outperform, Covered by Tom
Kraemer) to continue to retain their dominant leadership positions.
It is important to note here that it is imperative that WDC, QNTM,
Fujitsu and Hitachi keep pace with new product offerings, as a missed
product cycle has historically shown that it can take as much as 18
months to return to appropriate levels of competition.
Per IDC, The characteristics of this down-cycle are different than
they have been during other industry recessions. In previous down-
cycles, one or more suppliers have faltered, opening the door for
other industry participants to capitalize on the opportunity.
Historically, a period of insatiable demand has followed these more
difficult times and the consolidation and/or attrition that ensued.
Unfortunately for some industry players, the re-emergence this time
could be more gradual, as all suppliers appear to be executing at the
same time.
Additionally, in past cycles, new segments within the industry that
have often served as escape mechanisms (e.g. mobile and high-end
drives) remain extremely competitive. The end result of these factors
is that the large players are expected to continue to lose market
share, prices are expected to continue to erode, and smaller players
may continue to be aggressive in garnering increased market share.
Per IDC, only an exit of a major market participant would materially
ease the burden inherent in today's disk drive market - and nobody
realistically sees this happening in the foreseeable future. We
absolutely agree with this point.
Moving forward, many at the conference indicated that unit demand
appears healthy. The 1998 drop in demand due to a severe oversupply
problem in 1997 is expected to level-off around 17% Y/Y unit growth by
1999 and remain at this level through the next few years.
Revenue growth rates, on the other hand, will continue to be
difficult. Because of continued price instability, IDC forecasts call
for single-digit revenue growth through 1998, and only modest
increases (when and if prices stabilize) over the next few years to
approximately 15% by 2001. We believe that IDC may be a bit too
optimistic here with the 15% growth rate for 2001. We think that it
is prudent to assume single digit Y/Y revenue growth.
It should be noted that although it is not projected to be a high
dollar contributor to overall desktop HDD revenues, the 5.25" form
factor continues to exist as a differentiating alternative to low-cost
storage throughout the next few years. This may be helpful for QNTM,
the only provider in this area.
Per IDC, the High-End of the HDD Market is Showing Signs of Health but
Competition Remains Fierce
In the high-end, increased capacity and new products are fueling
improved growth of roughly 15% Y/Y in units (SEG has recently
indicated to us that the unit growth rate may be lower or flattish
overall). However, competition in this market continues to heat up.
Additionally, new disk spinning strategies are emerging out of these
product offerings at the high end. 10,000RPM drives are expected to
make inroads. Nonetheless, 7,200RPM drives are expected to be the
dominant force going forward. IDC forecasts call for a move to
15,000RPM drives using 2.5" media by mid-2000.
The Emergence of the Sub $1,000 PC Will Pressure Disk Drive Designers
The $999 PC continues to draw press. As a result, the HDD industry
has come under increasing pressure to make a fully-functioning drive
for under $85. Although many manufacturers have simply pushed their
obsolete inventory out the door to be installed into these inexpensive
computers, success in this segment of the industry lies in changing
the design of the drive, and, to a certain extent, changing business
models. Focus on this portion of the industry will become
increasingly more important, as the value-oriented PC is expected to
comprise nearly 25% of the total PC market by 2001.
Because of today's reliance on memory-intensive software and
application-specific uses of disk space, there will always be a
minimum capacity point that consumers will demand. As a result, new
drive designs intended for use in the sub $1,000 PC will need to
remain competitive with respect to aerial density. Costs will need to
be reduced in other areas.
Some have suggested that the key lies in integrating the electronics
for the drive on the motherboard and/or in moving to a one platter
design. When examining drive cost as a component of total system
cost, it is necessary to estimate what the ultimate floor is for PCs
as system costs continue to decline. As total system costs decline,
the percentage dedicated to the disk drive moves from approximately
13% (at a $999 PC price) to almost 18% (at a $499 price).
Some experts have suggested that in addition to the aforementioned
changes, in order to properly compete in the low-cost drive segment,
it is imperative to cut overhead and idle capacity - further reducing
the cost base. Some have even pointed to the disadvantage of vertical
integration in the manufacture of the sub 1,000 PC drive because of
its tremendous overhead drag.
In an interesting turn of industry events, Finis Conner (former CEO of
Conner Peripherals) has re-emerged on the scene. He is currently
starting up a company (called Conner Technologies for now) focused on
low-cost disk drives. Finis built Conner rapidly, making it the
fastest growing company in technology history at its time - we
wouldn't put anything past him.
In the high-end segment of the HDD industry, Rotations Per Minute
(RPM) assumptions are an integral part of drive design scenarios. As
7,200RPM drives begin to become standard at the mid-to-high-end, the
focus in value-oriented drives will be on 5,400RPM machines. Although
significant cost savings could result from maintaining availability of
4,500RPM drives, increasingly savvy customers in the $999 segment may
reject the lower rotational speeds in favor of the higher performance
of the 5,400RPM drives. 4,500RPM drives may remain for use in the
super-price sensitive segment, but maintaining three separate
rotational platforms could prove to be too costly for some drive
manufacturers. |
