Can PC Market Perk Up Computer Storage Devices Prospects?

The Zacks Computer-Storage Devices industry comprises companies that design, develop, manufacture and market a broad range of hard disk drives (HDDs) and solid state drives (SSD) utilized in PCs, laptops, mobiles, servers, network-attached storage devices, video game consoles, digital video recorders and a host of other consumer electronic devices.  

Some of the industry participants also provide software-defined all-flash solutions that are uniquely fast and cloud capable. There are others that offer high-performance memory subsystems and enterprise storage and data management software, and hardware products and services. The industry players also offer purpose-built servers, which are used for storing and accessing data over a shared network or through the Internet.

Let’s take a look at the industry’s three major themes:

•    Widespread use of storage options, from collocated hardware (such as hard disks and tape drives) to a multitude of cloud storage solutions has put the industry on growth trajectory. Extensive implementation of CRM solutions, increased Internet usage and rapidly growing media and regulatory compliance resulted in data explosion for enterprises. Notably, effective storage is essential for proper harnessing of data. Companies are increasingly relying on Artificial Intelligence for IT Operations (AIOps) and machine learning (ML) for effectively managing and optimizing storage solutions. To streamline data storage, companies are relying on virtualization technologies. Also, as more data gets gathered from IoT (Internet of Things), companies are turning to edge computing architecture to reduce latency and boost flexibility. Moreover, Kubernetes storage is becoming increasingly popular as it allows greater agility and scalability.  

•    A reviving PC market scenario should provide a boost to the industry’s top line. That’s because PCs remain the biggest user of HDDs and the industry participants still derive the bulk of their revenues from these devices. Per Gartner’s preliminary data, PC shipments in third-quarter 2019 inched up 1.1% year over year to 68 million units. Going by the IDC report, shipment rose 3% on a year-over-year basis and totaled 70.4 million in the period under review. An improving trend in PC shipments favors business prospects of some of the companies in this space, such as Western Digital Corporation (WDC), which continues to depend substantially on PC sales.

•    However, the Computer – Storage Devices industry is facing challenges owing to NAND flash pricing, which is currently witnessing decline due to oversupply and weaker-than-expected growth in end-market demand. Consequently, decline in prices is impacting revenues and margins of players in the space, somewhat negating benefits derived from improved demand and prices of DRAM products.

Zacks Industry Rank Indicates Cloudy Prospects

The Zacks Computer – Storage Devices industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #175, which places it in the bottom 30% of 251 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. Since Jan 31, the industry’s earnings estimate for 2020 has declined 24%.

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

Industry Lags Sector and S&P 500

The Zacks Computer-Storage Devices industry has underperformed the broader sector as well as the Zacks S&P 500 composite over the past year.

The industry has gained 27.8% over this period compared with the S&P 500’s rally of 31.1% and the broader sector’s rise of 33%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing computer storage devices companies, we see that the industry is currently trading at 15.79X compared with the S&P 500’s 18.43X. It is also below the sector’s forward-12-month P/E of 21.79X.

Over the past five years, the industry has traded as high as 15.79X and as low as 10.16X, with the median being 12.16X, as the chart below shows.

Price-to-Earnings (P/E) Ratio (F1)

Price-to-Earnings (P/E) Ratio (F1)

Bottom Line

Robust market adoption of cloud computing, big data, IoT, auto, connected devices, VR and AI will continue to aid revenue growth for the industry participants. However, operational risks, rising construction costs, entitlement delays, failure to fulfill government requirements and obsolescence of certain products are likely to remain headwinds.

Currently, none of the stocks in the Zacks Computer Storage Devices industry carry a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

However, we are presenting four stocks with a Zacks Rank #2 (Buy) or a Zacks Rank #3 (Hold) that investors may take a look at.

Pure Storage Inc. (PSTG): The company provides software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. It has gained 6.7% in the past year. The Zacks Consensus Estimate for this Zacks Rank #2 company’s current-fiscal EPS has increased 8.6% over the past 30 days.

Price and Consensus: PSTG

Seagate Technology PLC (STX): The company deals in HDDs, SSDs and solid-state hybrid drives. It has gained 67.1% in the past year. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-fiscal EPS has inched up 0.4% over the past 30 days. The company has a long-term earnings growth rate of 1.2%.

Price and Consensus: STX

 

Qumu Corporation (QUMU): This enterprise video solutions provider has gained 28.1% in the past year. It carries a Zacks Rank #3 and has a long-term earnings growth rate of 15%.

Price and Consensus: QUMU

NetApp, Inc. (NTAP): This enterprise storage provider has advanced 9.2% over the past year. It has a Zacks Rank #3 and a long-term earnings growth rate of 11.9%.

Price and Consensus: NTAP

 

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Western Digital Corporation (WDC) : Free Stock Analysis Report
 
Seagate Technology PLC (STX) : Free Stock Analysis Report
 
Qumu Corporation (QUMU) : Free Stock Analysis Report
 
Pure Storage, Inc. (PSTG) : Free Stock Analysis Report
 
NetApp, Inc. (NTAP) : Free Stock Analysis Report
 
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