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3 Storage Devices Stocks to Watch in a Flourishing Industry

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The Zacks Computer-Storage Devices industry players are well-poised to gain from solid momentum in cloud computing, Internet of Things (IoT), auto, connected devices, virtual reality and Artificial Intelligence (AI) in the long run. These factors propel the demand for robust data storage solutions, bolstering computer storage product requirements. These factors are favorable for prominent industry players like NetApp (NTAP - Free Report) , Western Digital Corporation (WDC - Free Report) and Pure Storage (PSTG - Free Report) . The democratization of higher internal memory smartphones, faster Internet speed and 5G, will likely act as a tailwind for industry participants. The rapid deployment of 5G networking is driving the proliferation of IoT, Advanced Driver Assistance Systems (ADAS) and Augmented Reality/Virtual Reality (AR/VR) devices. However, cautious IT spending amid global macroeconomic turbulence is a significant headwind in the near term, along with volatile supply chain dynamics and inflation.

Industry Description

The Zacks Computer-Storage Devices industry houses companies that design, develop, manufacture and market various hard disk drives (HDDs) and solid-state drives (SSDs). These drives are utilized in PCs, laptops, mobiles, servers, network-attached storage (NAS) devices, video game consoles, digital video recorders and other consumer electronic devices. Some industry participants, including Pure Storage, provide software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. Many industry players offer high-performance modular memory subsystems, mount and blade server systems, enterprise storage and data management software and hardware products and services. Some industry participants also provide purpose-built servers for storing and accessing data over a shared network or the Internet

4 Trends Shaping the Computer-Storage Industry's Future

Rapid Implementation of 5G Opening New Business Avenues: The accelerated deployment of 5G and rebound in the smartphone market will likely propel the industry to newer heights. Extensive implementation of cloud computing solutions, increased Internet usage and rapidly growing media and regulatory compliance have led to a data explosion for enterprises. The implementation of hybrid work models triggered the demand for data-intensive applications like video conferencing and cloud services. Adequate storage is essential for harnessing data and is expected to raise demand for high-storage capable SSDs and internal memory in advanced smartphones.

Innovation in Cloud Storage Technologies to Drive Adoption: Broader storage options from collocated hardware (such as hard disks and tape drives) to many cloud storage solutions have put the industry on a growth trajectory. The industry players are well poised for growth owing to a rapid increase in data, the complexity of data formats and the need to scale resources at regular intervals. These companies rely on Artificial Intelligence for IT Operations (AIOps) and machine learning (ML) to manage and optimize storage solutions. To streamline data storage, companies are relying on virtualization technologies. As more data is added from IoT, companies are turning to edge computing architecture to reduce latency and boost flexibility. Kubernetes storage is becoming increasingly popular as it facilitates greater agility and scalability. This has bolstered the deployment of high-capacity mass storage products, a positive for industry players.

Increases in IT Spending Bodes Well, Macro Conditions are a Concern: Per a report from Gartner, worldwide IT spending is projected to reach $5.26 trillion in 2024, calling for an increase of 7.5% from 2023 levels. This is an improvement over the earlier projection of overall spending of $5.06 trillion but marks a decline from the previous growth projection of 8%. The report also highlighted that data center systems spending growth is anticipated to be 24% in 2024, up from the previous projection of 10% growth. The upside will be driven by the increasing compute power demand owing to the rapid proliferation of Generative AI. However, Gartner stated that IT services spending is now projected to grow 7.1% in 2024, down from 9.7% projected earlier. This is mainly due to sluggish spending across subsegments, including business process services and consulting.

However, uncertain global macroeconomic conditions and supply chain dynamics are a drawback. Uncertainty in the macro backdrop and inflationary pressure could affect spending across small- and medium-sized businesses globally. The uncertainty in business visibility could dent the industry’s performance in the near term.

Momentum in PC Shipments Might Boost Growth Prospects: Worldwide PC shipments inched up 1.9% in the second quarter of 2024 owing to increasing U.S. PC market shipment volume, per a Gartner report. A stable supply chain and upcoming major platform updates bode well for the PC market, noted the research firm.  Earlier in the year, Gartner forecasted a 3.5% increase to 250.4 million units in PCS shipments to 2024. Gartner expects on-device AI to boost the marketing of PCs throughout the current year and help sustain current anticipated replacement cycles amid geopolitical and economic uncertainties.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Computer Storage is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #11, which places it in the top 4% of more than 251 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a downbeat earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s earnings estimate for 2024 stands at $5.22 against an estimate of $4.64 as of Mar 31, 2024.

Before we present a few stocks you may want to consider for your portfolio, considering bright prospects, let us look at the industry’s recent stock-market performance and valuation picture

Industry Outperforms Both S&P 500 and the Sector

The Zacks Computer-Storage Devices industry has outperformed the S&P 500 composite index and the broader sector in the past year.

The industry has surged 65.3% in this period compared with the S&P 500’s rise of 19.4%. The broader sector has gained 25.7% in the same time frame.

One-Year Price Performance


 

Industry's Current Valuation

On the basis of forward 12-month P/E (or Price/Earnings), which is a commonly used multiple for valuing computer storage devices companies, we see that the industry is currently trading at 19.58X compared with the S&P 500’s 21.27X. It is above the sector’s forward-12-month P/E of 26.4X.

In the past five years, the industry has traded as high as 183.94X and as low as 11.21X, with the median being 17.86X, as the charts below indicate.

Forward 12-Month Price-to-Earnings (P/E) Ratio

3 Computer-Storage Devices Stocks to Add to Watchlist

Western Digital Corporation: Headquartered in San Jose, CA, Western Digital provides a broad range of HDD and Flash storage solutions used in desktop PCs, servers, network-attached storage devices, video game consoles, digital video recorders and a host of other consumer electronic devices.

Western Digital is well-positioned to gain from upward revenue trends across HDD and Flash businesses. An uptick in ASP pricing and improving demand for its nearline HDD offerings, especially SMR drives, is a tailwind.
WDC noted that SMR-based drives represented 50% of nearline exabyte shipments in the fiscal third quarter. For the fiscal fourth quarter, the HDD segment is likely to gain from healthy momentum in its SMR product portfolio. Management expects robust demand for GenAI-driven solutions across its end markets to power demand for HDD and Flash offerings.  A leveraged balance sheet amid volatile global macro conditions and fierce competition are concerns. Management is on track to complete the splitting of the HDD and Flash businesses into two separate entities by the second half of 2024.

WDC sports a Zacks Rank #1 (Strong Buy) currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for fiscal 2024 earnings per share for the company improved to a loss of 54 cents per share compared with a loss of 62 cents registered 60 days ago. The stock has appreciated 56.1% in the past year.

Price and Consensus: WDC

NetApp: Headquartered in San Jose, CA, NetApp is a leading provider of enterprise storage, data management software and hardware products and services. NetApp’s performance is gaining momentum from demand across the all-flash and cloud storage portfolio. All-Flash Array Business’ annualized revenue run rate (ARR) was $3.6 billion, up 17% year over year in the last reported quarter. Fiscal 2025 revenues are expected to be in the band of $6.45-$6.65 billion with revenue growth expected in each quarter.  The company expects its strong foothold in tackling critical customer priorities, such as business analytics, AI, cloud transitions, data security and application modernization to drive expansion. Management also expects Public Cloud revenues to return to steady growth in fiscal 2025. Robust share repurchases and dividends are noteworthy. A weak macroeconomic environment and price increases on NAND from suppliers are concerning.

Currently, NTAP carries a Zacks Rank #2 (Buy).  The Zacks Consensus Estimate for fiscal 2025 earnings remained unchanged at $6.86 per share in the past 30 days. The stock has surged 60.2% in the past year.

Price and Consensus: NTAP

Pure Storage: Headquartered in Mountain View, CA, Pure Storage provides software-defined all-flash solutions that are uniquely fast and cloud-capable for customers.

Pure Storage’s performance is gaining from higher sales to new and existing enterprise customers across the data storage platform. Robust demand for FlashBlade solutions, including FlashBlade//E and subscription-based offerings, is a plus. Subscription services revenues (49.9% of total quarterly revenues) of $346.1 million rose 23.5% on a year-over-year basis in the fiscal first quarter. Going ahead, it expects healthy demand trends to drive top-line expansion. Revenues for fiscal 2025 are projected to be $3.1 billion, implying a 10.5% rise from fiscal 2024. TCV sales for Evergreen//One & Evergreen//Flex subscription service offerings are estimated to be $600 million. Management remains concerned about the volatile macroeconomic landscape. Tough competition in the flash-based storage market poses an additional headwind.

At present, PSTG carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2025 earnings per share for the company stands at $1.64, unchanged in the past 30 days. The stock has appreciated 57.3% in the past year.

Price and Consensus: PSTG



 



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