Lawrence, I think we are all scared the gains we've seen recently will go away. It's clear, as you say, the industry is in trouble. Nothing presented at Diskcon contradicts this. But, perhaps components have some opportunity.
So, recently HDD stocks had been so hard hit, they reached a point where investors felt they must have hit bottom. The rally has held up so far, and indications are showing increased demand. At some point, there must be value. Can you hear my voice cracking on the must as really hard to show conviction.
Clearly, the main players are reasonably well funded and have capacity in place satisfy demand, but there is no product differentiation and more capacity seems to be planned rather than less. It is purely a loosing game of wrestling a little business from each other based on momentary technical advantages, or temporary increases in demand that will be easily filled by the over capacity. So, where is the value?
One interesting point, sub $1000 PC's may have been the elephants grave yard of inferior drives. Going forward, drives will have to be designed from the bottom up to make the leanest cost, highest performance drive for the price. Again, this segment of the desk top may hit 50%. A major growth area, but not one to find high profits.
So, I guess we all expect to retest the lows and wonder when it starts. It's a market timing issue. Will stocks go up another 10 or 20% before it starts? I think there is a balance of expectations of interest rate cuts and further economic crisis. One we get our rate cut, I would guess we'll see a slow decline that will be painless at first. Certainly, the HDD companies, which have little reason to attract investment, will go down?
Perhaps we should take a poll for opinions of highest near term price, end of the year and in February. It could be very telling of whether we are all just trying to get a few extra points before the top, or really viewing the group with renewed interest, or fear.
Warning WAG coming!
Company 1 month Dec 31 Feb 1
SEG..............21............ 23.........25
QNTM..........13.5.........15..........17
WDC.............9.5...........10..........12
MXTR...........10............10............12
RDRT...........11...........11..........14
APM..............4..............4.............7
HMTT..............8.............8.............12
KMAG...........2.5.........2..............2
HTCH...........18.........18............25
INVX..............12.5.....17.............19
Again, I look to a cut in rates to signal a decline unless we get some good earnings which I doubt. I think we might get a little rally to end the year flat or slightly down, and then barring serious trouble like Hillary divorcing Bill, we might see a strength in the new year that would give us higher prices than today.
The HDD makers will probably show sequential sales, but can they squeeze profit? PC makers won't give them any break. Maxtor seems to be the darling and they'll probably continue to add market share. Quantum has the tape business to help. SEG, perceived industry bell weather will probably react positive or negative to whatever wind blows. WDC seems to be the weakest player. IBM strengthened them, but at what cost. I'm not sure I'd short them, but I wouldn't buy either. I expect little upside from this group.
For components, I think we will see some technical advantage emerge. I think positive announcements from RDRT have improved their position. An announcement from Seagate seems likely and maybe Quantum. They seem to have some good technical position to build on with their GMR program going forward. RDRT can also add value with flex circuits. Probably not a big business, but viable. Flex circuits going into advanced chip packaging may be very big for them in the next 2 years.
I don't know much about media and HMTT, but they seem to be working with RDRT and that could give them an advantage. Other media makers seem to have a hard path.
The suspension business is changing. Smaller heads need a different system of interconnection using a wireless product. This gives HTCH a chance to get 3 or 4 times the price of a conventional suspension by adding value with their TSA wireless solution. There is competition, but clearly conventional suspensions are going away and acceptance of TSA has been good. Hutchinson's problem has been one of production, but it appears that they've made a lot of progress in the last month. They've actually been notifying customers they won't supply conventional suspensions going forward. I think they feel ready to make good numbers and will show a profit next quarter.
Acceptance of wireless would seem to kill Innovex and their wire business, but they also have a wireless solution called FOS (Flex-on-Suspension). In fact, I count 6 companies offering credible wireless solutions. Seagate is using Innovex's FOS, and the settlement of a lawsuit this week solves an obstacle to acceptance, pre-bonding suspensions. Also, TSA and some other wireless replacement solutions require a new bridging circuit that INVX may supply which would also be a high margin product. Near term, Maxtor has been very interested in their product and I look for an announcement before long. FOS is a lowest cost solution with good margins. Flex circuits also offer great, huge potential in advanced chip packaging. It could dwarf their disk drive business. I am bullish on INVX.
I hope Larry Kuznet will forgive us. It was a busy week.
Regards,
Mark |
