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A Negative Spin for Hard Drive Stocks

The industry is up against some tough headwinds


It’s been a tough day for the hard drive operators, especially for OCZ Technology Group (NASDAQ:OCZ). The stock is off today by 23% to $4.13. Seagate Technology (NASDAQ:STX) is also feeling the pressure: Its stock is down by 3.5% to $31.39. Yet Western Digital (NASDAQ:WDC) has bucked the trend and is essentially unchanged at $42.

The problem is that Needham & Co. has published some negative research. For example, it dropped the rating on Seagate from a strong buy to a hold, and OCZ’s rating went from a buy to hold. Granted, Needham kept its strong buy on Western Digital, but the firm lowered its price target from $61 to $53.

Keep in mind that yesterday OCZ issued a warning for its fiscal second quarter. The company forecasts sales of $110 million to $120 million, which is down from the prior guidance of $130 million to $140 million. OCZ said it’s suffering from a shortage of NAND flash memory components.

Now, this should be resolved within the next couple quarters (in the ultra-competitive hardware world, shortages have a way of turning into surpluses!). But for investors, the big-picture issues are the inexorable trends in the PC market. Let’s face it, this segment has been mature for many years — witness the dismal growth of companies like Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ).

The PC industry is also undergoing a disruptive change from the growth in tablets, especially from Apple (NASDAQ:AAPL) and its iPad. It’s true that tablet devices also need storage but not necessarily the technologies that Seagate, Western Digital or OCZ make.

Interestingly enough, the move to ultrabooks is another challenge because they don’t need as much storage capacity. For the most part, they tend to rely on cloud-based services. It seems archaic these days to store photos, videos and documents on a computer.

While the cloud does represent a nice opportunity for storage companies, the industry still requires highly cutting-edge technologies, not commodity systems. In fact, the space is fiercely competitive, with standout companies like Fusion-io (NYSE:FIO).

So, as should be no surprise, Needham points out that hard drive inventories have risen as demand has fallen for notebooks, desktops and even servers. True, part of this is from the slowing macroeconomy. But another factor is certainly the changing dynamics of the PC world.

Even though Seagate and Western Digital trade at low valuations — with price-to-earnings ratios of 5x and 6x, respectively — this is not enough of a reason to buy their shares. With a deceleration of revenue growth, investors will have little to get excited about when it comes to putting money into the sector.

Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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