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3 Storage Devices Stocks to Watch for in a Prospering Industry

The Zacks Computer-Storage Devices industry benefits from encouraging trends in PC shipments and solid momentum in cloud computing, Internet of Things (IoT), auto, connected devices, virtual reality and Artificial Intelligence (AI). These factors propel the demand for robust data storage solutions, bolstering the demand for computer storage products. This is favoring the prospects of prominent industry players like Pure Storage PSTG, Super Micro Computer SMCI and Netlist NLST. Democratization of higher internal memory smartphones, faster Internet speed and 5G is likely to act as a tailwind for the industry participants. 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, negative impacts stemming from the pandemic-triggered supply chain disruptions and component shortages are a concern in the near term.

Industry Description

The Zacks Computer-Storage Devices industry comprises companies that design, develop, manufacture and market a wide variety of 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. A few industry participants, including Pure Storage, provide software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. Further, many industry players like Netlist that 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 used for storing and accessing data over a shared network or through the Internet.

4 Trends Shaping the Future of the Computer - Storage Industry

New Normal Trends & Rapid Implementation of 5G Opening New Business Avenues: Coronavirus-induced work-from-home and the implementation of a hybrid work model have triggered demand for data-intensive applications like video conferencing and cloud services. Effective storage is essential for properly harnessing data and is expected to raise demand for high-storage capable SSDs and internal memory in advanced smartphones. Accelerated deployment of 5G and rebound in the smartphone market are likely to propel the industry to newer heights. Extensive implementation of cloud computing solutions, increased Internet usage and rapidly-growing media and regulatory compliance, driven by coronavirus-led work-from-home setup, have led to data explosion for enterprises, which bodes well for the industry participants.

Innovation in Cloud Storage Technologies to Drive Adoption: Extensive use of storage options from collocated hardware (such as hard disks and tape drives) to many cloud storage solutions has put the industry on a growth trajectory. The industry players are well poised for growth on the back of a rapid increase in the amount of data, the complexity of data formats and the need to scale resources at regular intervals. 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 amassed from IoT, the 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, which is a positive for industry players.

Expectations of an Increase in IT Spending: According to a Gartner report, worldwide IT spending is expected to increase 4% from 2021 levels and reach $4.4 trillion in 2022. Higher technology spending will drive the upside as enterprises continue to build sound technological infrastructure. Though geopolitical disruptions, inflationary pressures and protracted pandemic-induced supply chain troubles remain major concerns, these factors are unlikely to affect the global recovery seen in IT spending, as per Gartner. This bodes well for the industry’s performance.

Slowing Momentum in PC Shipments Might Hinder Growth Prospects: Worldwide PC shipments dropped 6.8% to 77.9 million units in the first quarter of 2022, according to the latest data compiled by Gartner. The latest Gartner report depicts the end of the massive spike in PC demand due to the pandemic-led work-from-home and online learning wave. In the first quarter, sales were affected by reduced sales of Chromebook as schools began reopening. A slowing PC market does not augur well for the industry participants.

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 #105, which places it in the top 42% of more than 252 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.

Before we present a few stocks that 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 Sector but Lags S&P 500

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

The industry has lost 10.9% over this period compared with the S&P 500’s decline of 6.2%. The broader sector has declined 18.1% 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 11.82X compared with the S&P 500’s 17.24X. It is also below the sector’s forward-12-month P/E of 20.96X.

In the past five years, the industry has traded as high as 20.8X and as low as 10.43X, with the median being 14.49X, as the charts below indicate.

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

Forward 12-Month P/E Ratio

3 Computer-Storage Devices Stocks to Add to Watchlist

Super Micro Computer: The San Jose, CA-based company designs, develops, manufactures and sells energy-efficient, application-optimized server solutions based on the x86 architecture. The company's solutions include a range of rack mount and blade server systems and components. Super Micro also produces server boards, chassis and server systems.

In the last reported quarter, the company’s revenues of $1.36 billion surged 51.3% year over year. For fiscal 2022 (ending June 30, 2022), the company now expects net sales to be in the range of $4.2 -$4.6 billion compared with the earlier guidance of $4.96-$5.04 billion.

Shares of Super Micro Computer, which sports a Zacks Rank #1, have gained 49.2% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for fiscal 2022 earnings for the company improved 42.5% to $4.56 per share in the past 60 days.

Price and Consensus: SMCI

Netlist: The Irvine, CA-based company designs and produces high-performance modular memory subsystems for a wide variety of industries across various verticals.

The company's memory subsystems are developed for applications in which memory plays a key role in enabling overall system performance. These applications include tower servers, rack-mounted servers, blade servers, high-performance computing clusters, engineering workstations and telecommunication switches.

At present, Netlist carries a Zacks Rank #2 (Buy).  Shares of Netlist have gained 107.6% in the past year. Moreover, its long-term earnings growth rate is pegged at 15%.

Price and Consensus: NLST

Pure Storage: Pure Storage performance is gaining from continued momentum in Pure as-a-Service, Portworx and Evergreen Storage subscription services. The company is benefiting from strength across FlashArray and FlashBlade businesses and strong growth prospects in the data-driven markets of AI, ML, Internet of Things (IoT), Real-time Analytics and Simulation

Recently, Pure Storage collaborated with the likes of Snowflake, Kyndryl, and Amazon Web Services to further expand its technology portfolio. For the first quarter of fiscal 2023, Pure Storage’s total revenues increased 50% from the year-ago quarter to $620.4 million. In the fiscal first quarter, Pure Storage added 360 customers. The company’s customer base includes 54% of the Fortune 500 companies.

Pure Storage carries a Zacks Rank #3 (Hold). Shares of the company have surged 45.4% in the past year. The Zacks Consensus Estimate for fiscal 2023 earnings for the company improved 1.1% to 88 cents per share in the past 60 days. Moreover, its long-term earnings growth rate is pegged at 18.5%.

Price and Consensus: PSTG

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