I think there are a number of factors that formed a more perfect storm over the last month. The uncertainty after the CCs in Jan., the strong US dollar, the warning from INTC, the low trading volumes (not necessarily always the total - but intraday, sometimes a mere 1000 shares being sold into a large spread causes disproportionate movement), and the seeming resurgence of "comment" from the IBs after several years of quiescence. Afterall, more MCV means more trading profits.
"So WDC/STX have some sales in the SSD market. But its a different industry and they don't own the fab producing the NAND so they are at an inherent disadvantage versus Hynix, Samsung, Micron etc."
With respect to this comment: The flash is just the media inside a drive. Really no different than platters - which for more of its history than not, were not made by the HDD companies. There is a big difference between making media and making drives. The flash producers are at an even more significant disadvantage to the HDD makers when it comes to designing, producing, marketing, distributing and supporting drives. The flash manufacturers have found it much harder to crack the drive business than you can imagine. Especially for a profit.
Hello again, rom!
Yeah - at one time or another, each of us has probably felt like we are the Joe Btfsplk of the HDD stocks. And I don't know about too many Yogiisms, but as it relates to the last month around WDC, "It's déjà vu all over again" seems particularly appropriate.
This whole market freak out over when and by how much the Fed will raise rates is a complete piece of BS by the bears (or the wimpy bulls hoping for a break to get in). As you say, after almost 7 years of doing all it can to revive the economy, it will not sink it at this point. A token 1/4 or even 1/2 pt increase is not going to skew the investment alternatives very much (.5 added to the avg .3 savings rate is still peanuts - and well below whatever we think inflation is). It will not change the economic outlook for the US. Even housing.
What the world needs now (with apologies to famous psychic Dionne Warwick) - is for Europe to get its act together and create some economic growth. That includes getting Comrade Putin to put his ego back into the Faberge egg (that will be a tough assignment - but Europe will get a stimulus kick if they can start trading normally with Russia).
As for the HDD/storage sector, this downturn sucked about $7Bill out of STX/WDC market valuations - valuations which already trailed the avg. All for what - if rumors are true - may be a cumulative $300Mill to $600Mill sector-wide revenue miss. If it is a significant miss, we should get a warning within the next 2 weeks. (The impact of the US dollar is an unknown, but both companies do a lot of hedging, so its tough to tell.)
Look at the details in the 10Q. The most significant impact was the $758Mill payment to STX. Other big ticket items were stock buyback of $532Mill, and Purchases of investments = $595Mill. Not sure what's in that last category.
Even after paying STX, still close to $5Bill in cash.
I can't tell you whether all the clamor is warranted or not - at least with respect to storage. As I said some days (or was it weeks) ago, at a US distribution level, you wouldn't know what all the hubbub is about.
I honestly stopped paying close attention to inventories and prices because ... nothing ever changed.
So I decided to see if my perception was right or wrong.
The last download I saved was from August, 2014. I downloaded stock and prices again this morning.
Inventories are no different than they have been for several years.
Over the past 7 months, prices on the low end desktop drives have decreased less than 3%, while the mobiles are only a little higher (just over 3%). High cap desktop drives have decreased about 4%-5%. The largest decreases have been in the high cap enterprise space, where 15%-20% are seen (but again, they started from much higher prices and GMs, and probably still are - relative to their DT counterparts). There were no comparisons on some of the newer high cap drives that are shipping now, or on drives that primarily ship into the OEM space (I can only see disty).
Maybe the TAM will decrease in line with what STX/WDC projected. Maybe a little more. I don't know. But it does not appear that drive margins are being sacrificed.
Take it FWIW. If the world stops generating data to store, we have a problem in the storage space. Until then, today looks much the same as yesterday ... last month .... last year.
The TAM topped out in 2011 at ~180Mill/qtr. The sector has lived with the TAM being between ~125Mill and ~145Mill ever since (leave out flood impacted qtrs.). And it has been more profitable than ever.
What matters most is gross margins, combined with a respectable TAM. And as the enterprise/high cap/cloud space has grown, that pushes sales to a richer mix. Higher GM. So TAM alone does not carry as much weight as it did 5 years ago.
So when you see an analyst fixated on a single HDD sector parameter, there's usually a reason for that slant. Focus on the negative for a negative push.
Respectable analysts push for the balance, and let the scales weigh whatever reality is. There's only a few of those - and those are becoming endangered.
I don't think SSD is a significant factor - yet.
Other than SWAG, there is no way to know it BEFORE all the HDD manufacturers report.
Even during the STX CC, Luczo had no real idea since they were the first to report. And they are the closest to the data as anyone can get.
And the TAM, while still important, does not carry as much weight as it did 5 years ago.
On the first part, yes - exceeded max character.
Apparently, I had to wait for someone else to respond to my post before I could post the second part as a response. Because I didn't change the text of the second part once it did post.
I don't STX would want to censor this board. But there would be many other sharks that would. (Don't think that's the issue - its just the new and improved Yahoo)
STX said TAM at 135Mill, down 5% to 7% from Dec. Well, what if its ~130Mill according to Merrill Lynch?
That's 5Mill fewer HDDs. At an ASP of $61, that's $305Mill less revenue. Actually, it may be less than that because these 5Mill drives will mostly be those that cost LESS than the ASP. (BTW: 5Mill fewer CPUs would take anywhere from $500Mill to $1Bill out of Intel, before currency effects).
So Wall Street decides to take ~$6BILL out of the HDD sector value for a revenue decrease 20x less.
As usual, Wall Street gets a much bigger bang for the MCV buck on a downtick vs an uptick.
So Intel says PC sales are slowing? And Wall Street takes it out on the HDD companies (like always).
First, this was not a total surprise - if you were listening to the HDD guys. Here's the Q & A from the STX CC:
"Sherri Scribner (Analyst - Deutsche Bank):
Okay. Can I just ask quickly, I know we've talked about it a little bit, but the TAM guidance of down about 7% Q over Q after a pretty soft December quarter based on typical seasonality, seems kind of high to me. We haven't seen that kind of decline since 2009. Just trying to understand what you're seeing that make you so cautious. Thanks.
Steve Luczo (Chairman and CEO):
We didn't say 7%, we said we think 135 million units. I tend to rewrite that sentence. Sorry, I garbled it. We don't really know where December came in, is the issue. Of course being the first reporter, it could be a 142 million units, could be a 144 million units. Maybe when the dust settles in a couple of week, we'll know really.
Depending on that range and depending on what your expectation is for TAM next quarter, it talks to 5% to 7%. I'm not going to debate that. That's kind of where we think.
I think part of it is just, again, the momentum. December is always a tricky quarter because sometimes the momentum accelerates and sometimes it decreases. Sometimes that impacts what happens in the March quarter and sometimes it doesn't.
It definitely slowed down on the client side in December. That has us cautious. And frankly the issues around currency and what's going on in Europe. I just think it's wiser to aim for the lower TAM and we can obviously leverage up a couple of million units pretty easily as an industry versus over-producing.
Again, I have to look at the Intel midpoint and that's a company that doesn't have a lot of price pressure. They guided down 7% on the midpoint of the range, so we have to take that as input as well. "
STX was already more pessimistic than normal.
More to follow.
Go away for a vacation and all heck breaks loose .....
Anyway, the Intel news sure isn't welcome. But it should not have been a complete surprise. Even during the STX & WDC CCs, they indicated that orders were already seen as slowing. The HDD guys were more pessimistic than Intel had been (go read the STX CC).
So the HDD guys had compensated their projections downward more than INTC seem to indicate. Whether they had compensated enough remains to be seen. So far, prices have not shown any unusual behavior (actually, boring) and stock levels are about the same as they have been for several years. In other words, at the disty level, you wouldn't know about all the hubbub that Wall Street is making.
Anybody that buys into this "employment & wage growth is bad because rates may go up" is just an idiot. Or a short/trader hoping and praying for more MCV.
I found one other glaring problem in their analysis.
How did ML come to justify a price target for STX of $50?
From their report: "Our PO of $50 is based on 10.0x C16 EPS of $5.02."
Now, we've gone round and round for 15 years about the multiples that get assigned to STX (& WDC). I mean, you can pull just about any old multiplier out yer whazoo to justify anything you want. And as pointed out elsewhere, there is strong evidence that somebody was frontrunning this release on the options. Options that required a stock price below ~$58 to make money. So they needed to come in somewhere comfortably below that - to help their friends out.
Anyway, what did they say about WDC? From their WDC report: "Our PO of $117 is based on 13x C16 EPS of $9."
HUH? Wait .... these two companies have nearly identical market footprints and close to the same margins. You may think WDC is better run (OK), but STX is returning much more of cash flow to shareholders than WDC (that deserves some benefit, doesn't it?).
So what if they had applied the same multiple to STX? Hmmm ... 13x$5.02 = $65.26
Ohhhhh ... that will never do. Won't help their friends during March, at all.
Now, they did hedge themselves by saying this about the WDC multiple: "In our opinion, the multiple partially
reflects the potential accretion from a favorable MOFCOM ruling."
HUH (part 2)? They estimate WDC will earn $1.58 more if MOFCOM releases them. So magically, WDC gets a double benefit - a higher multiple AND higher earnings. That ain't right. WDC simply becomes a more efficient company in the same market. The increase in earnings will boost the stock price (which it should). Why should the multiple also be higher?
BTW ML: STX also operates under MOFCOM restrictions. If WDC gets released, I strongly suspect STX will also. It won't be worth as much per share earnings wise, but it will help.
All in all, a very suspect report produced to support a clients agenda.
Underperform and $50 target
So the stocks were up strong yesterday. They must have been bidding them up to get a bigger down today.
Investment banks must create MCV! MCV! MCV! MCV!
What is this, deja vu all over again? Did we just recycle a rumor from 2010? Is this sierrawhatever the same company that rumored OCZ was going to be bought out 10x higher than what it finally died at?
A small purchase, but hidden within the Q&A document released by WDC was this gem:
"Q14: Can you talk about your target customers and ballpark the TAM for your Active Archive business?
A14: The Active Archive platform are targeted at public and private cloud data centers that need highly scalable and affordable solutions for storing and accessing increasing amounts of data over longer periods of time. According to IDC, the TAM for scale-out object-based software and storage appliances will be $15.4B this year and will grow to $21.7B by 2017.
In addition to the TAM characterized by IDC, we believe that there is a sizable greenfield market for storing valuable data that exceeds the projected amount of storage capacity being shipped. By providing a more affordable solution to storing, protecting and accessing this excess of valuable data, we believe that our Active Archive platform can address this vast area of “non-consumption.” Market research firms indicate that the volume of this excess valuable data will exceed the market capacity of traditional storage systems by 2017."
Read the last sentence carefully.
Over the last few months, STX has stated this, as well. This is the first time WDC has concurred.
If you have the HDD firmware source code, you could embed the hack into the code, then deliver the hacked package to any system the same way any other virus gets into a computer. The package could then surreptitiously reflash the firmware and all you might notice is your system locked up and needs to be rebooted. How many times does that happen under normal conditions? Once the system reboots, you never see the difference.
They could even load the hacked package onto a system and tell it to delay installation until the evening of the 2nd Tues. of the month. When Microsoft loads all the updates and your system reboots anyway. Ever notice all the strange messages on your screen during the reboot from the update? They could easily be reprogramming ANY part of your system.
As for MOFCOM - no impact.
BTW: If we want to start worrying about viruses being pre-loaded onto drives at the factory (highly unlikely), then why haven't we been worried about Chinese hacks being preloaded onto all the HDDs made in China - for decades?
ANY software in ANY device can be hacked. Even devices you don't normally think of as "computers." HDD firmware is just software stored differently from other conventional locations.
The hacking effected ALL HDDs and some SDDs, all manufacturers. And it was embedded after the drives shipped from the manufacturers (we think?). Of course, how did NSA get the source code?
So there could be 3 choices made at this point: avoid all HDDs & SSDs (give up computers); replace every drive with clean drives (don't ask me how to prove that); go on with life as you have because the NSA doesn't care about you.
I prefer the last option.
But what I really want is better oversight of NSA - that agency is out of control.