Oftentimes it's the case that investors can see which companies are likely to have the most volatile stocks by checking out the range on analyst estimates. The bigger the spread, the more uncertainty and the more potential for positive (or negative) developments. With an enormous range of analyst expectations, a traditionally cyclical industry, and encroaching competition, Seagate (Nasdaq:STX) is not likely to be boring over the next couple of years.
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Apres le deluge
Thailand is home to a variety of electronics manufacturing facilities, and the country was beset by nearly six months of flooding that started in mid-2011. That flooding not only devastated the lives of many Thais, but also had major impacts on the hard drive industry.
Even today (near the end of the first calendar quarter of 2012) the effects are still visible. A recent report from Morgan Stanley highlighted that hard drive channel inventory is still running about 50% below normal and the average selling prices are about 50% above normal.
Seagate has come out of this disaster in relatively good shape. While rival Western Digital (NYSE:WDC) experienced massive disruptions, Seagate fared better and grabbed significant market share at Western Digital's expense. While the company is unlikely to hold all of these gains, the floods are likely to change industry dynamics insofar as major customers are likely to pursue long-term supply agreements that should give more favorable pricing to drive manufacturers. For related reading, see Marvell Starting To Get Interesting.
How bad will NAND be?
One of the bigger long-term risks to Seagate is the transition from hard drives to solid state drives. While the price of NAND flash memory has established SSDs as a luxury relative to traditional HDDs, companies like Micron (Nasdaq:MU) continue to increase NAND production and prices are falling. With a variety of performance advantages inherent in SSDs, it's only a matter of time before they grab more and more share away from HDDs.
In the PC market, long a cornerstone of HDD demand, it's an inevitability. Tablets are chipping away at notebook demand, while SSD drives are becoming increasingly affordable.
That doesn't mean that HDDs are completely doomed. Fusion-IO (NYSE:FIO) has been leading the charge of moving SSDs into enterprise storage, but HDDs are likely to be a central part of EMC (NYSE:EMC) and NetApp (Nasdaq:NTAP) products for a while. At the same time, gaming and mobile devices are still a growth market for HDDs.
Last and not least, consider the case of those old tape drives - they've been "obsolete" for quite a while now, but companies like IBM (NYSE:IBM) continue to develop and sell new systems. In other words, HDDs aren't going to disappear overnight even if SSD adoption increases.
Looking for the New Normal
Seagate has clearly thrived in the midst of this major market disruption, but the company is not going to be able to hang on to all of this. The question, then, is how quickly matters go back to normal and what the new normal looks like. While Western Digital should regain share and some PC sales are going to be forever lost to tablets, the release of new products from Intel (Nasdaq:INTC) and Microsoft (Nasdaq:MSFT) should drive a PC refresh cycle that should be supportive for HDD demand and pricing.
The Bottom Line
At this point, it looks like the market already expects a major revision back to "normal cyclicality," and then a resumption of relatively mediocre growth thereafter. That said, the spread on expectations is pretty large - there's a greater than 70% deviation between the high and low revenue estimate for fiscal 2013, and the spread in the next year is not much different.
That suggests a huge range of potential fair values out there and a lot of uncertainty as to the real growth trajectory for the company. Bullish investors who think they have some particular insight into this market could really do well with these shares, but the flip-side offers a big risk if they're wrong. One way or another, the next 18 months are not likely to be boring with Seagate's stock.
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.