3 Stocks To Snap Up As Computer Storage Devices Show Promise

Encouraging trends in PC shipments and solid momentum in cloud computing, IoT, auto, connected devices, VR as well as AI necessitate the need for robust data storage solutions required to harness the power of big data.

This has bolstered demand for computer storage products, which favors the prospects of prominent industry players, including Seagate (STX Quick Quote STX - Free Report), Western Digital (WDC Quick Quote WDC - Free Report), and NetApp (NTAP Quick Quote NTAP - Free Report).

Further, the democratization of higher internal memory smartphones, faster Internet speed, and 5G is likely to act as a tailwind for the industry participants.

Moreover, rapid deployment of 5G networking is driving the proliferation of the Internet of Things (IoT), Advanced Driver Assistance Systems (ADAS), and Augmented Reality/Virtual Reality (AR/VR) devices. This, in turn, holds promise.

Thereby, the outlook for the Zacks Computer-Storage Devices industry looks encouraging at the moment. Nevertheless, persisting impacts of coronavirus pandemic-triggered supply chain disruptions are an overhang.

Industry Description

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 (SSDs) 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, including Pure Storage (PSTG Quick Quote PSTG - Free Report) and NetApp, also provide software-defined all-flash solutions that are uniquely fast and cloud-capable. There are others that offer high-performance memory subsystems, enterprise storage, and data management software as well as hardware products and services.

The industry players also provide purpose-built servers, which are utilized for storing and accessing data over a shared network or through the Internet.

4 Trends Shaping the Future of the Computer – Storage Industry

Continued Momentum in PC Shipments to Boost Growth Prospects: Improving trend in PC shipments in 2021, due to coronavirus crisis-induced demand, is likely to positively impact business prospects of the industry participants. This is because demand for HDDs in manufacturing PCs is the highest and companies in this industry, including Seagate and Western Digital, derive bulk of their revenues from the sale of such devices. Per the latest IDC report, PC shipments in first-quarter 2021 increased 55.2% year over year to 84 million units. Moreover, improving NAND flash pricing trends owing to COVID-induced supply chain constraints is a tailwind.

New Normal Trends & Rapid Implementation of 5G Opening New Business Avenues: Coronavirus crisis-induced work-from-home and stay-at-home trends have triggered demand for data-intensive applications like video conferencing and cloud services. Notably, effective storage is essential for proper harnessing of data and is expected to accelerate demand for high storage capable SSDs and internal memory in advanced smartphones. Moreover, the accelerated deployment of 5G and rebound in the smartphone market is likely to propel the industry to newer heights. Furthermore, extensive implementation of cloud computing solutions, increased Internet usage as well as rapidly-growing media and regulatory compliance-driven by a coronavirus-led work-from-home wave has resulted in data explosion for enterprises. Also, stay-at-home trends are likely to bolster sales of gaming SSDs. Additionally, increasing utilization of surveillance and drones amid the coronavirus outbreak is anticipated to favor the adoption of storage products, which bodes well for 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 a multitude of cloud storage solutions has put the industry firmly 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. Moreover, the 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. As more data gets amassed from IoT, companies are turning to edge computing architecture to reduce latency and boost flexibility. Notably, 49% of the 175 ZB data produced in 2025 is projected to be stored in the cloud. In addition, Kubernetes storage is becoming increasingly popular as it facilitates greater agility and scalability. This, in turn, has bolstered the deployment of high-capacity mass storage products, which is a positive for industry players.

Expectations of IT Spending Picking up Pace Bodes Well: The industry players are expected to benefit from a recovery in IT spending in 2021. Per a Gartner report, worldwide IT spending is expected to increase 8.4% compared with 2020 levels and reach $4.1 trillion. The growth will be driven by demand for enterprise software as well as devices, added the report. Last year, the coronavirus crisis led to lockdowns brought about a shift in consumers’ buying patterns. The broader macroeconomic weakness across small and medium-sized businesses has raised concerns regarding the industry’s prospects. However, gradual reopening of economies as vaccine is rolled out globally and recovery witnessed across various sectors is expected to drive the IT spending levels and benefit industry participants.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Computer Software is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #99, which places it in the top 39% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates weak 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.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since Nov 30, 2020, the industry’s earnings estimate for 2021 has improved by 28.2%.

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 and S&P 500

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

The industry has gained 67% over this period against the S&P 500’s gain of 40.8%. Notably, the broader sector has rallied 45.1% 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 15.72X compared with the S&P 500’s 21.62X. It is also below the sector’s forward-12-month P/E of 26.17X.

Over the past five years, the industry has traded as high as 18.49X and as low as 9.94X, with the median being at 13.42X, as the charts below show.
Forward 12-Month Price-to-Earnings (P/E) Ratio

Forward 12-Month P/E Ratio

3 Computer-Storage Devices Stocks to Snap Up

Seagate is one of the leading manufacturers of HDDs, SSDs, and solid-state hybrid drives (SSHD). The company is benefitting from solid demand for 16 terabyte (TB) products along with 18 TB drives.

Further, the company expects a recovery in enterprise markets to gather pace in 2021, which augurs well for its nearline and mission-critical drives. Seagate also expects an increase in uptake of its mass capacity storage solutions in the crypto, cloud, and edge computing verticals

Rebound in video and image applications’ market, as well as the higher sale of consumer drives and uptick in PC shipments, augur well for this Zacks Rank #2 (Buy) company.  

Shares of Seagate have rallied 95.2% in the past year. The Zacks Consensus Estimate for fiscal 2021 earnings for the company moved up 3.5% to $5.27 per share in the past 30 days. This reflects on bullish sentiments for the stock. Moreover, its long-term earnings growth rate is pegged at 1.2%.

Price and Consensus: STX

Western Digital is poised to benefit from momentum seen in the SSD market as these storage solutions find increasing applications in connected cars and data centers. Encouraging PC shipment trends led by solid demand for notebooks are likely to support the company’s HDD business.

Improving enterprise markets and higher demand for flash solutions in the gaming vertical hold promise for this Zacks Rank #2 company. Also, increasing demand for its 16- and 18-terabyte energy-assisted drives are expected to drive the top line, going ahead.

Notably, shares of Western Digital Computer have surged 70.3% in the past year. The Zacks Consensus Estimate for fiscal 2021 earnings increased 23.4% to $3.69 per share in the past 30 days. This reflects on bullish sentiments for the stock.
Price and Consensus: WDC

NetApp is benefiting from strength in all-flash business and Public Cloud Services. The company is also gaining from the growing clout of cloud-integrated all-flash solutions; File, Block, and Object Software products; and hybrid multi-cloud offerings.

Recent acquisitions of Spot, Cloud Jumper, and Talon Storage have been immediately accretive to revenues and are likely to act as key catalysts for this Zacks Rank #2 company.

Notably, shares of NetApp have gained 68.1% in the past year. The Zacks Consensus Estimate for fiscal 2021 earnings for the company is steady at $4.01 per share in the past 30 days. Moreover, its long-term earnings growth rate is pegged at 8.8%.

Price and Consensus: NTAP

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