The Zacks Computer-Storage Devices industry comprises companies that design, develop, manufacture and market a broad range of hard disk drives (HDDs) utilized in desktop PCs, servers, network-attached storage devices, video game consoles, digital video recorders and a host of other consumer electronic devices.
A few companies 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.
Here are the three major themes in the industry:
- The industry is benefiting from increasing use of high-storage mobile devices. Widespread use of streaming media, cloud storage solutions, cloud-based apps, data virtualization and other data-intensive activities have put the industry on growth trajectory. The industry players are well poised for growth on the back of rapid increase in the amount of data, complexity of data formats and the need to scale resources at regular intervals. Extensive implementation of CRM solutions, increased Internet usage, and rapidly growing media and regulatory compliance has resulted in data explosion for enterprises. This in turn has bolstered the deployment of high-capacity mass storage products, which is a positive for the industry participants. Notably, effective storage is essential for proper harnessing of data.
- However, declining PC shipments is detrimental for industry participants. That is because the demand for HDDs in manufacturing PCs is the highest and companies in this industry still derive the bulk of their revenues from the sale of such devices. According to the recently released worldwide PC shipment data by Gartner and IDC even the back-to-school season failed to lift the PC market. Per Gartner’s preliminary data, PC shipments in the fourth quarter of 2018 fell 4.3% year over year to 68.6 million units. Going by IDC, worldwide PC shipment also dipped 3.7% on a year-over-year basis and totaled 68.1 million in the final quarter.
- Moreover, the Computer – Storage Devices industry is facing challenges owing to NAND flash pricing, which is currently on the decline on account of 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 from improved demand and prices for 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 #186, which places it at the bottom 27% 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 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. In the past year, the industry’s earnings estimate for the current year has decreased 39.7%.
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 lagged the broader sector as well as the Zacks S&P 500 composite over the past year.
The industry has declined 19.3% over this period against the S&P 500’s rally of 8.5% and the broader sector’s growth of 8.2%.
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 9.82X compared with the S&P 500’s 18.2X. It is also below the sector’s forward-12-month P/E of 20.25X.
Over the past five years, the industry has traded as high as 11.88X, as low as 7.80X and at the median of 9.80X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Forward 12 Month Price-to-Earnings (P/E) Ratio
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 and failure to fulfill government requirements are likely to remain headwinds.
Here, we present one stock carrying a Zacks Rank #2 (Buy) that is well positioned to gain despite the prevailing challenges. There are also a couple of stocks with a Zacks Rank #3 (Hold) that investors may retain for the time being. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Qumu Corporation (QUMU): This enterprise video solutions provider has gained 48.1% over the past year. The Zacks Consensus Estimate for this Zacks Rank #2 company’s current-fiscal EPS has remained steady at a loss of 46 cents over the past 60 days.
NetApp, Inc. (NTAP): This enterprise storage provider has advanced 10.5% over the past year. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-fiscal EPS has increased 2% over the past 30 days.
Seagate Technology PLC (STX): This hard disc drives, solid state drives and solid state hybrid drives provider has gained 27.9% on a year-to-date basis. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-year EPS has remained steady at $4.66 per share over the past 60 days.
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