Send me real-time posts from this site at my email
Motley Fool

Investors Shouldn't Ignore Seagate's SSD Business

Seagate Technology (NASDAQ: STX) is one of the two largest makers of platter-based hard disk drives (HDDs) in the world. It generated 92% of its revenues from HDDs last quarter, and the rest came from solid state drives (SSDs) and other data storage products.

SSDs, which store their data on NAND flash memory chips instead of platters, are smaller, faster, more power-efficient, and less prone to damage than HDDs. But they're also more expensive -- which makes them less appealing to cost-conscious data center customers.

Image source: Getty Images.

Seagate's top HDD rival, Western Digital (NASDAQ: WDC), diversified into the NAND and SSD markets by acquiring SanDisk in 2016. As a result, WD generated 40% of its revenues from flash memory chips and SSDs last quarter. Seagate didn't make a comparable acquisition, and instead focused on selling higher capacity HDDs to enterprise customers.

It might seem like Seagate doesn't care about the SSD market. However, investors shouldn't ignore Seagate's quiet moves into this market, which could eventually diversify its business away from traditional HDDs.

Understanding Seagate's SSD business

Samsung (OTC: SSNLF), Western Digital, Kingston, Toshiba (OTC: TOSBF), and Micron (NASDAQ: MU) are currently the five largest SSD makers in the world. These companies all transitioned smoothly into the SSD market because they produced first-party NAND chips.

Seagate previously sourced its NAND chips from Micron and SK Hynix. To fill that gap in its supply chain, Seagate joined a consortium of investors -- led by Bain Capital -- in a joint acquisition of Toshiba's memory chip business in 2018. Seagate's $1.27 billion investment added Toshiba's NAND chips to its supply chain and allowed it to produce SSDs at lower prices.

Yet Seagate's SSDs still controlled less than 1% of the market last year. That's likely because the five leaders already controlled nearly three-quarters of the market and left little breathing room for their smaller competitors.

Seagate doesn't disclose its exact SSD revenues separately. Instead, its sales are lumped together with other data storage products in its "enterprise data solutions, SSDs, and other" unit -- which hasn't grown much over the past year:

Period

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Revenue (millions)

$190

$225

$189

$167

$188

YOY growth

(21%)

6%

(13%)

(8%)

(1%)

% of total sales

6%

8%

8%

7%

7%

Data Source: Seagate. YOY = year over year.

However, the unit's sequential growth has been stabilizing, thanks to waning macro headwinds and improving PC sales.

During last quarter's conference call, Seagate CFO Gianluca Romano noted that the pricing environment for SSDs has "been challenging for multiple quarters" -- due to competition and cyclically low NAND prices -- but reiterated that its "main focus has been on enterprise SSDs, which complement our mass capacity HDD solution to provide our customers with a more complete storage solution portfolio."

Image source: Getty Images.

In other words, Seagate doesn't plan to go head-to-head against the market leaders in SSDs for consumer PCs. In addition to enterprise SSDs, which are pricier but have higher capacities, Seagate also recently launched its new FireCuda gaming SSDs for PC gamers.

PC gamers are generally willing to pay more for high-end SSDs, but Seagate's FireCuda SSDs still face tough competition in the market from similar products like Western Digital's WD Black 50 SSDs. Seagate also recently unveiled its new BarraCuda Fast SSD, an external drive which comes with a USB 3.1 Gen 2 port and a two-month subscription to Adobe's Creative Cloud Photography plan.

Will these efforts move the needle for Seagate?

Seagate's steps into the SSD market are long overdue, but it's unclear if they're aggressive enough to keep pace with the market leaders.

Yet investors should realize that Seagate isn't simply burying its head in the sand when it comes to SSDs. It might not be a major pillar of its business today, but its focus on higher-end niches in the enterprise and gaming markets could gradually diversify its business away from traditional HDDs over the long term.

10 stocks we like better than Seagate Technology
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Seagate Technology wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

*Stock Advisor returns as of December 1, 2019

Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Adobe Systems. The Motley Fool has a disclosure policy.


Source

Popular posts

Welcome!!! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue