GM, as a person who's knowledgeable about the disk drive business, even if you don't qualify as a professional analyst (let's be thankful for little favors), can you explain why the Robertson Stephens analyst thinks the disk drive business is >>a good one to be in<<?
Does he think it's good because of the thrill he gets watching the stock prices bounce around so much?
Or does the thrill and satisfaction come from knowing he's already dumped any stock he might have held before the sector got trashed (do analysts really buy any of these stocks with their own money? I think I'm starting to get a little paranoid).
techweb.com
>>Patrick Tenney, an analyst at Robertson Stephens,
based in San Francisco, likes Seagate. "This is a good
business -- it's also very cyclical and very seasonal,"
he said. "Seagate will emerge from this down cycle
stronger."<<
Outlook Bleak For Disk Drive Makers
( 1/07/98; 5:07 p.m. EST)
By Gabrielle Jonas, TechInvestor
Things will get worse before they get better for disk
drive makers this earnings season, and some
profit-impaired companies may not survive at all in the
long run, according to analysts.
On Wednesday, Seagate was the latest in a long line
of storage companies that issued profit warnings.
Seagate said it would report a substantial loss for the
second quarter. On Monday, Read-Rite said it
expected to report lower-than-expected sales and
earnings for its first quarter.
The company, based in Milpitas, Calif., said it will
report sales of $261 million. Read-Rite [RDRT] will
report earnings Jan. 21.
In addition, Quantum [QNTM], a disk drive maker
also based in Milpitas, was downgraded by three
different analysts in December after issuing its own
profit warning. But Quantum and Seagate aren't alone.
Western Digital is also making profit warnings a habit.
Get used to it, because the short-term prognosis is
ugly. A combination of sub-$1,000 PCs, Asia's
financial turmoil, and excess inventory are all hurting
storage stocks.
"There's a little bit more pain to be felt," said David
Takata, an analyst at Gruntal & Co., based in Beverly
Hills, Calif. "Typically, these companies in the real bad
lulls will dip into losses, and I think this quarter, you'll
see losses because of one-time charges. I wouldn't be
surprised to see that continue for one or a couple of
quarters, until there's some sort of shakeout in the
industry."
Ashok Kumar, an analyst at Loewenbaum & Co., in
Austin, Texas, said things won't shape up for a while.
"Short term -- for the next couple of quarters --
there's going to be some pain, but long term,
everything will work out," he said.
The Largest Will Survive
The shakeout in the disk drive industry may leave only
the strongest standing, Takata said.
"The last time there was this kind of problem, Maxtor
was acquired by Hyundai. Maxtor [virtually] faded
from view," Takata said. "I think the same thing --
some consolidation in the industry -- will happen
again."
Takata has picked his winners and losers. "Seagate is
probably in a very strong position to survive, and likely
to emerge stronger than ever," he said. "After the
shakeout, Quantum is a very strong vendor with its
strong Japanese partner, Matsushita-Kotobuki
Electronics, to make the hard drives. Western Digital
is probably my third pick."
Quantum, Seagate [SEG], and Western Digital
[WDC] comprise 75 percent of the desktop market,
and 62 percent of the total market overall, analysts
said. For the first nine months of 1997, Quantum
shipped 6.6 million units; Seagate, 7.8 million units;
and Western Digital, 6.2 million.
Quantum in particular, with 60 percent of its profits
coming from its tape-drive division, is well-positioned
to meet increasing consumer demand for that kind of
data storage.
Patrick Tenney, an analyst at Robertson Stephens,
based in San Francisco, likes Seagate. "This is a good
business -- it's also very cyclical and very seasonal,"
he said. "Seagate will emerge from this down cycle
stronger."
Of the three, Western Digital is in the weakest
position. "Western Digital has the least vertically
integrated of any of the companies," Takata said. "It
has the least control over its own technology,
depending on outside vendors for technology such as
heads. Therefore, Western probably needs to do
something to shore up its technology portfolio, or
either acquire or get acquired."
Smaller Players Hurt
Until the disk drive vendors can get their houses in
order, companies such as Read-Rite, which supply
heads to the disk drive vendors, will be hit hardest,
Takata said.
"Some smaller players -- vendors like JTS, which tried
to address niche opportunities -- will probably fall by
the wayside," said Kumar. "Clearly, they won't have
the critical mass to make it through."
JTS [JTS], which was acquired by Atari in 1996,
designs, makes, and markets hard disk drives for
desktop PCs. In December, the company said in an
Securities and Exchange Commission filing that it had
incurred significant losses associated with the costs of
designing, developing, and marketing new products,
establishing manufacturing operations, and developing
a supplier base.
Revenue from the disk drive division for the quarter
ended Nov. 2, 1997, was $23.8 million, from $32.1
million in the year-before quarter. During the quarter,
JTS shipped 201,000 disk drives, mostly 3.5 inches,
from 1 gigabyte to 4.3 GB.
Who's To Blame?
A combination of factors have put storage companies
in their predicament. Analysts can recite the factors
with ease -- sub-$1,000 PCs, Asia's financial turmoil,
and excess inventory.
Analysts said companies such as Fujitsu, Maxtor, and
Samsung were gaining market share by undercutting
larger players. Those moves, coupled with an overall
slowing of the PC market growth rate to 14 percent
estimated in 1998 from 20 percent in 1997, have put
the squeeze on vendors. Toss in Asia's problems, and
disaster can't be too far behind.
Cheaper PCs are one of the prime reasons for disk
drive makers' woes. "The sweet spot of the market
has gravitated to the lower end," said Kumar. "The
hottest-selling item today in the retail market is the
sub-$1,000 PC, and at that price point, the budget for
a 2-GB hard disk drive is around $99 -- which means
most of these vendors are selling below cost."
But supply and demand is the root of all disk drive
makers' problems.
"Regarding the supply and demand imbalance, at the
beginning of the year, we thought it was just a supply
problem," said Tenney of Robertson Stephens. "Now
we have a demand problem, which makes the whole
thing worse."
"There are no major operating systems or software
cycles driving PC growth, so PC growth in the U.S. --
though it can look very good -- is coming from
low-end PCs, and that's not beneficial to disk drive
makers," said Tenney. "It does not appear those
low-end PCs are bringing in new consumers." |
