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Zacks Industry Outlook Highlights: NetApp, Western Digital, Teradata and Pure Storage

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For Immediate Release

Chicago, IL – September 23, 2021 – Today, Zacks Equity Research discusses Computer Storage, including NetApp, Inc. NTAP, Western Digital Corporation WDC, Teradata Corporation TDC and Pure Storage, Inc. PSTG.

Link: https://www.zacks.com/commentary/1799392/3-storage-devices-stocks-to-watch-amid-a-challenging-industry

The Zacks Computer-Storage Devices industry is benefitting from encouraging trends in PC shipments and solid momentum in cloud computing, Internet of Things (IoT), auto, connected devices, virtual reality as well as Artificial Intelligence (AI). These factors propel the requirement for robust data storage solutions, which has bolstered the demand for computer storage products. This is favoring the prospects of prominent industry players like NetAppWestern Digital and Teradata.

Democratization of higher internal memory smartphones, faster Internet speed and 5G is likely to act as a tailwind for 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 are a persistent 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 and NetApp, provide software-defined all-flash solutions that are uniquely fast and cloud capable.

There are others that offer high-performance memory subsystems, mount and blade server systems, enterprise storage and data management software along with 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.

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 Western Digital, derive a bulk of their revenues from the sale of such devices. 

Per the latest IDC report, PC shipments in second-quarter 2021 increased 13.2% year over year to 83.6 million units. 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 along with implementation of hybrid work model have triggered demand for data-intensive applications like video conferencing and cloud services. Effective storage is essential for proper harnessing of 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 as well as rapidly-growing media and regulatory compliance driven by coronavirus-led work-from-home set up 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 a multitude of cloud storage solutions, has put the industry on a 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.

The companies are increasingly relying on Artificial Intelligence for IT Operations (AIOps) and machine learning (ML) to effectively manage and optimize storage solutions. To streamline data storage, companies are relying on virtualization technologies. As more data gets 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, in turn, has bolstered the deployment of high-capacity mass storage products, which is a positive for industry players.

Expectations of an Increase in IT Spending Could be Affected by Worsening COVID-19 Situation: Per a Gartner report, worldwide IT spending is expected to increase 8.6% from 2020 levels and reach $4.2 trillion. The upside will be driven by higher technology spending as enterprises realize that sound technological infrastructure is the key to positive business outcomes, added the report.

However, the situation is getting worse with the emergence of a more contagious Delta variant strain. Several parts of the world (Australia and Japan) are grappling with a massive spike in infection rates, leading to stringent lockdowns.

Some regions in the United States are afflicted by the Delta variant outbreaks as well. This is likely to affect spending across small- and medium-sized businesses, globally. The uncertainty in business visibility could put a dent on the industry’s performance in the near term.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Computer Storage is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #179, which places it in the bottom 29% of more than 252 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. 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.

Despite a gloomy industry outlook, some stocks are worth watching in the market. But before we present the top industry picks, it is worth looking at the industry’s shareholder returns and current valuation first.

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 in the past year.

The industry has gained 72.7% over this period compared with the S&P 500’s growth of 36.6%. Notably, the broader sector has rallied 44.7% in the same time frame.

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 12.30X compared with the S&P 500’s 20.94X. It is also below the sector’s forward-12-month P/E of 27.75X.

In the past five years, the industry has traded as high as 20.8X and as low as 10.43X, with the median being at 14.57X.

3 Computer-Storage Devices Stocks to Watch Out

Teradata’s performance is being driven by momentum in recurring revenues. Its efforts to expand cloud-based features of Vantage is a key catalyst. The solution is available across top public cloud vendors like Google Cloud, AWS and Azure.

Teradata generates significant revenues from sectors like financial services, government and healthcare, which remain stable despite the pandemic. This provides an impetus to Teradata’s top line. The completion of its transition to a subscription-based business model is expected to boost recurring revenues. Teradata carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Shares of Teradata have surged 128.7% in the past year. The Zacks Consensus Estimate for 2021 earnings has been steady at $1.96 per share in the past 30 days. The long-term earnings growth rate for the company is pegged at 14.3%.

NetApp is benefiting from continued strength in the Hybrid Cloud and Public Cloud segments as well as robust billings growth. Growing clout of cloud-integrated all-flash solutions; File, Block and Object Software products; and hybrid multi-cloud offerings augurs well.

Rapid adoption of Microsoft Azure NetApp Files is a tailwind. Synergies from the recent acquisitions of Spot, Cloud Jumper and Talon Storage bode well for this Zacks Rank #3 (Hold) company.

Shares of NetApp have gained 113.9% in the past year. The Zacks Consensus Estimate for fiscal 2022 earnings for the company has improved 7.6% to $4.97 per share in the past 30 days. Moreover, its long-term earnings growth rate is pegged at 8.8%.

Western Digital is gaining from the recovery in the enterprise markets and higher demand from cloud customers. Encouraging PC shipment trends, led by solid demand for notebooks, are likely to support the company’s HDD business.

Robust demand for 18-terabyte energy assisted drives and second-generation NVMe enterprise SSDs is expected to boost this Zacks Rank #3 company’s top line. Demand for WD Black product line remains strong owing to gamers’ preference toward more customized solutions.

Shares of Western Digital have surged 42.5% in the past year. The Zacks Consensus Estimate for fiscal 2022 earnings has been steady at $10.71 per share in the past 30 days.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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NetApp, Inc. (NTAP) : Free Stock Analysis Report
 
Western Digital Corporation (WDC) : Free Stock Analysis Report
 
Teradata Corporation (TDC) : Free Stock Analysis Report
 
Pure Storage, Inc. (PSTG) : Free Stock Analysis Report
 
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