It’s been a rough road for old-school hard disk drive (HDD) manufacturers ever since solid state drives (SSDs) emerged as a credible replacement for their clunkier and slower predecessors. Consequently, shares of leading HDD makers Western Digital Corp (NASDAQ:WDC) and Seagate Technology PLC (NASDAQ:STX) fell out of favor with the investing universe, tanking to multi-year lows.
But that’s where the similarity between the two companies end. Whereas one company has managed to reinvent itself, the other seems to have lost the will to survive. If you love a good comeback story, WDC stock, now the leading HDD maker, fits the bill to a tee.
WDC Stock Makes a Comeback
When WDC purchased flash memory maker, SanDisk, in a $19 billion deal in 2016, not everybody was sure it was a very smart move. After all, SanDisk itself was getting raked over the coals after NAND flash prices cratered, leading to the company’s shares nearly being cut in half.
But that decision now looks remarkably prescient. The cyclical upswing in NAND memory prices has proven to be a gift horse for WDC stock. NAND flash memory prices have hit their highest in three years, driven by growing demand by smartphone makers particularly in China. Western Digital’s NAND flash revenue grew an impressive 70% year over year during the second quarter, meaning mobile and retails flash sales have now exceeded the company’s PC-OEM sales.
Better still, the outlook is expected to remain bright over the next three years. Chip-price data provider ChinaFlashMarket has predicted a 63% growth clip for the NAND market to top $65 billion by 2020, and finally overtake DRAM as the biggest memory market.
Booming flash memory sales have helped Western Digital topline return to impressive growth. The company reported revenue growth of 63% during the last quarter, a far cry from a year ago when it posted -14.7% growth. Consequently, WDC shares have been on a tear, racking up gains of 29.6% in the YTD and 70.5% over the past 12 months.
Expanding Flash Portfolio
But WDC is not just sitting on its laurels. The company has been in a never-ending buying spree in a bid to expand its flash portfolio, and has already made significant inroads this year. WDC has been pursuing a $17B purchase deal for Japanese flash manufacturer, Toshiba, though that deal has been highly contentious. Toshiba is the world’s second-largest NAND flash manufacturer, with 21% market share, bigger than Western Digital’s 14% share. Buying out the Toshiba flash business would put WDC within sniffing distance of Samsung Electronics Co Ltd (KRX:005930) market-leading 37% global share.
Just a couple of days ago, a Japanese publication reported that Toshiba had awarded Western Digital and a group of investors to purchase its flash unit for around JPY 2 trillion ($18.2 billion). But now the Wall Street Journal has reported that a rival consortium led by Apple Inc. (NASDAQ:AAPL) and WDC’s rival Seagate Technology have signed a letter of intent to buy the business. Western Digital and Toshiba have been embroiled in legal battles regarding the sale, and it’s hard to tell whether the roll of dice will finally favor WDC .
Nevertheless, WDC has managed to ace other flash deals. The company purchased California-based all-flash arrays maker, Tegile Systems, for an undisclosed sum in August. Tegile brings along 1.7K customers for data center application storage solutions. WDC also announced the acquisition of cloud services company, Upthere, for an undisclosed sum. Western Digital plans to add Upthere’s tech to its large Client Solutions unit.
So, basically WDC is covering all flash bases including client, enterprise and cloud.
STX Losing Out to WDC
Meanwhile, long-time rival Seagate seems to have lost its will to survive. The last significant memory acquisition by the company was the purchase of Samsung’s HDD business back in 2011, in a bid to maintain maintain parity with WDC. Meanwhile no flash deals have been forthcoming from the company.
STX has been cutting costs and restructuring operations, including massive layoffs and changes to the management team. These moves have helped to goose the bottomline. However, being permanently on the defensive can only take you so far if you are doing little on offense.
STX has been dead money as I predicted two years ago. STX shares are down 28% in the past six months. The company has suffered a revenue tailspin that dates back more than 10 quarters, and sees little hope of reversing its fortunes. If STX manages to land the Toshiba purchase, though, it will mark the company’s first significant flash footprint, and could breathe some life into STX stock.
The Bottomline on WDC Stock
Despite the huge rally, WDC stock sports a forward PE ratio of just 7.23. Acquisition of the Toshiba flash unit will likely be immediately accretive to earnings, and could see the shares jump ~30-40% over the next 12 months. In the event the purchase falls through, sustained high NAND prices would still be enough to support further gains in the 15-20% range for WDC stock, and further gains over the next couple of years. WDC stock looks like a nice bargain from here.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.