No, it isn't easy to figure out this stock, especially at these levels in this context. What does the earnings power of the company become if a healthy supply/demand balance will exist for at least the next, say, 2-3 years? With SSDs becoming attractive and affordable enough for OEMs to include them as standard (Apple has already set that standard, others will follow next year or in 2015, IMHO), is there really a danger of oversupply at any time soon?
Here is a repost of an interview with Seagate CEO Steve Luzco done by Eric Savitz at Forbes last September. He puts some numbers on the SSD opportunity that shows how much capital investment in NAND would have to occur in order to actually replace HDs with SSDs. The short answer is, a lot, a whole whole lot. Of course, that won't happen because HDs will be cheaper in the foreseeable future than SSDs, so for high capacity storage, HDs will be preferred. But that leaves a whole lot of space for more SSDs.
The entire interview is here:
forbes.com
Below is the most relevant excerpt vis a vis NAND:
Q: Steve, this is an industry that has been consolidating for 30 years. A whole bunch of once-public companies that gone, Maxtor, Micropolis, Miniscribe. We’re now down to three, and one of those, Toshiba, is relatively minor. Is this process now done? And if so, do we now see an industry where pricing is more stable? Are the boom-and-bust days over for the drive business?
A: At the drive level you’re done. And you are probably done for the most part throughout the supply chain. As much consolidation that has occurred in drives, upstream it has occurred too. There used to like 9 head companies, and now there’s just one, TDK. In media there were 25 companies, and now there’s 3. Or 2. There has been a lot of consolidation, and the companies that had the strongest technology or the lowest costs have tended to survive, that’s how it is supposed to work.
Q: So will the economics of the business improve?
A: If you look back 5-6 years, there have not actually been a lot of boom and bust cycles other than the macro economy. Supply and demand has been getting more and more in balance, especially as the supply chain has consolidated. You just don’t have as much potential for excess capital as it consolidates. People are more cautious about over-investing. Also, the technology has gotten so much harder -unless you’re vertically integrated, it is really difficult to make next generation products.
Q: And what about pricing?
A: You have a situation where supply and demand probably more often than not is more closely aligned and therefore you don’t have massive under-supplies or massive over-supplies. In the last few years, you’ve either had over-supply because there’s been a shock to the economic system, or under-supply because there’s a shock to the economic system. We had the recession in 2008, where all of a sudden, boom, no one bought drives for four months, so there was this over-supply. But then all of a sudden everybody realized, oh my God, they still needs drives, and everyone had cut back their capital, so there was this huge rebound, and the industry couldn’t respond, so margins went from 15 points to 32 points. And you had the whole European slowdown, which caught the industry and everyone off guard.
Q: But the point is, the drive industry was not the victim of its own bad decision making.
A: Right. It was not so about bad allocation of capital, which is what it was before. The industry has done a pretty good job for the last 4-5 years, and will continue to. But you do have to remember that it is fundamental to our business that you have to keep lowering the price of technology. You have to go from 1.7 billion people using the Internet to 2.5 billion. To get there, chip costs have to come down, drive costs have to come down, bandwidth has to come down. Otherwise you can’t address the developing markets. There’s no doubt that even with three players, it is going to be an aggressive business – but I think some of the volatility gets reduced.
Q: So, Steve, will that give the Street more respect for what you do? Drive companies historically trade at some of the lowest P/Es in the entire stock market.
A: Investors don’t fundamentally understand what we do. They tend to think, if things are bad, that’s how they’re going to stay, and if things are good, they’re going to get bad. That’s really been the philosophy. The glass is either half-empty, or its empty. Do I think that’s going to change? I don’t know. There are other big successful technology companies where you scratch your head and say why are they trading at an 8 P/E. Why is Microsoft trading at an 8 P/E? Why is Intel trading at an 8 P/E? I think a lot of it is a different discussion entirely, which is do our capital markets fairly value companies anymore fundamentally, and I’ll tell you my answer is no.
Q: Why not?
A: Because they’re not being price on fundamentals, they’re being priced by the large investment banks for volume. And volume requires volatility. So that’s why all the big firms are in a different camp than the smaller research firms on their perspective of the drive industry. Is it because these are the smart guys, and those aren’t? That doesn’t make any sense. It is because the big banks are motivated by volatility and the boutique firms aren’t. And therefore the research reflects that. So you can create an environment that always creates doubt, with billion dollar market cap swings in a week. It’s insane. Why does that work? Because you have traders who love to make that work. So do I think that changes? I don’t know that I see that changing for our equity markets in general, which is a terrible thing for the efficient allocation of capital. Does it change at the margin for the drive industry, if there is less volatility? Sure, I think it does. It takes time though. It’s going to take time.
Q: Let’s talk about the impact of flash memory on the drive industry.
A: Any analyst who is worrying about that fundamentally doesn’t understand the industry. Flash is a complimentary technology, it’s not a competitive technology.
Q: Intel is out pushing ultrabooks with all their might. Some have drives, and some of which don’t.
A: If you want to store anything on it, it will have a drive, or you are going to pay a lot of money for flash. I mean, yeah, if a bunch of rich people in Atherton want to buy a PC for $1,000 that has 128 gigs, then, sure. I just don’t think that is much of the world, and oh by the way, if they have that machine, they have some other machine somewhere that’s got 5 terabytes on it, because I can’t do much with 128 gigs. So those products that are built for speed and mobility, those still need support of mass storage somewhere. And oh by the way, most ultrabooks, or thin and light, which is a different term – ultrabook is an Intel marketing term, so hopefully you’ve received your check this week for using that term – those have certain requirements on performance, and certain budgets on price. And the right answer for that is probably going to be a hybrid drive, because that is the only thing that can get you the performance they’re asking for at the budget they’re asking for if you want any amount of storage capacity.
Q: What about the idea that tablets have begun to cannibalize laptop sales?
A: Maybe they have. But then they’ve driven storage sales somewhere else. If it’s an Internet access device, which is what I think it is, then people are using it to watch YouTube and share videos. So where is all that stuff?
Q: Sitting someplace on a drive. So, demand for drive capacity will continue to grow.
A: Our industry shipped 100 exabytes of data five years ago, 400 exabytes in 2011, and we’ll probably ship a zettabyte sometime between 2015 and 2016. A zettabyte is equal to all the data that’s been digitized from 1957 through 2010. Everything, however you want to think of it, cards, tapes, PCs, mainframes, client/server, minicomputers – one zettabyte. And we’re going to ship that in one year. So whatever the architecture is, pads, phones, notebooks, ultrabooks, real notebooks, PCs, servers, clouds, one year, a zettabyte – that’s all going to be on rotating mass storage.
Q: And demand will keep ratcheting up from there.
A: By 2020, that number is somewhere between 7 and 35 zettabytes, depending on who you’re talking to – Seagate, which says 7, or EMC, which says 35. There is no amount of flash that can even address one tenth of one percent of that. People get locked in to this view at a device level. Yes, you could have some number of units that are serviced by flash. Let’s hope so. In fact, my bigger concern is that the flash guys can’t figure out how to keep delivering the performance and costs that they’ve been able to as they get to sub-21 nanometers, than it is that somehow they’re going to replace HDDs. Not without literally $500 billion of investment in fabs they’re not. And even then they’d only be scraping the surface.
Q: Someone said to me if you tried to replace all world’s drives with flash, today – your 400 exabytes – that there’s not even enough flash capacity in the world…
A: It would be like 25% of that. And that would mean not building any phones or iPads or anything else. And what’s the revenue opportunity for that? 25% of the drive market is $10 billion. So you’re going to turn over every fab in the world for $10 billion, even though they’re generating probably $150 billion doing the other stuff? Think of it the other way though – if I am trying to address 400 exabytes of data, and ok we admit the whole world’s not going to go that way – like we admit its only 20% of the notebook market – so the notebook market is 125 exabytes, and 20% of that is 25 exabytes; that means I need four of the most recent Samsung Fab 16s – the world’s largest memory fab – four. That’s $50 billion. And by the way – it has to be up and running today.
Q: What’s the total global capacity of magnetic media now?
A: Again, 400 exabytes, which is why units don’t matter. You can increase units, but they you’re taking a big exabyte hit. Here’s the real question – if you’re trying to grow exabytes, what’s the capital investment to grow exabytes. For flash, it is $10 billion at a chunk, which is what it takes to build a new chip fab. For drives, it’s a fraction of that. If the industry had to grow from 400 to 500 exabytes, we’d do that on $1 billion of capital.
Q: To get to a zettabyte, how much additional capital is that?
A: About $1 billion a year for us, and then about $1 billion a year for WD. Versus $50 billion. Here’s the more interesting question. I don’t think we can get to 10-20 zettabytes. I think around 2016, we start running into a sustained storage on meeting exabyte demand unless somehow people start getting aggressive on capital. And the only way people are going to get aggressive on capital is if there is some stability on margins. People look at drive capacity, but our industry isn’t about drive capacity. That just means final assembly and test. There’s also media, heads, chips, a lot of other stuff that has to happen before it all gets stuck into a disk drive. I |
