A significant drop off in average selling prices (ASP) for NAND flash memory could take a huge bite out of profits from storage providers including Seagate Technology PLC (STX) and Western Digital Corp. (WDC), according to one team of analysts on the Street.
On Tuesday, shares of the technology hardware makers plunged on a bearish report from Evercore ISI, in which analyst C.J. Muse downgraded Seagate to underperform from "in line" and cut his rating on Western Digital to underperform from "in line."
NAND Pricing Weakness to Weigh on Storage Stocks
Shares of Seagate are down 2.5% on Wednesday morning at $48.19, reflecting a 15.2% gain year-to-date (YTD), compared to the S&P 500's 7.7% return in 2018. Meanwhile, shares of Western Digital have underperformed the broader market this year. Trading down 0.7% at $59.85, the stock reflects a near 25% loss YTD.
Evercore's downbeat view on the sellers of hard drives and flash memory storage devices echoes a note from bears at Goldman Sachs who reduced their rating on Seagate shares last month, citing cyclical factors favoring next-gen hardware and cloud solutions. Goldman pointed to oversupply in the solid-state disk drive (SSD) market coupled with weaker pricing for firms that sell SSDs and hard disk drives (HDDs).
While Seagate shares have rebounded after the Goldman note, in part thanks to a solid earnings beat in the most recent quarter, Muse remains concerned over "complacency around NAND pricing" and the "increasing HDD cannibalization risk." He expects NAND ASPs to fall by a "low double-digit percentage in the first half of 2019, citing similarities to the pricing cycle which began in late 2014 and coincided with a major decline in storage device demand. The analyst cut his price target for Seagate to $45 from $55, implying a 6.6% downside from Wednesday morning.
As for Western Digital, another victim of "worsening NAND price declines," Muse reduced his price target from $100 to $75, reflecting a 25% upside from current levels.