Zacks Industry Outlook Highlights Super Micro Computer, NetApp, Western Digital and Pure Storage
For Immediate Release
Chicago, IL – February 13, 2024 – Today, Zacks Equity Research discusses Super Micro Computer SMCI, NetApp NTAP, Western Digital WDC and Pure Storage PSTG.
Industry: Computer Storage
Link: https://www.zacks.com/commentary/2224523/4-storage-devices-stocks-to-watch-in-a-flourishing-industry
The Zacks Computer-Storage Devices industry players are well-poised to gain from solid momentum in cloud computing, Internet of Things (IoT), auto, connected devices, virtual reality and Artificial Intelligence (AI) in the long run. These factors propel the demand for robust data storage solutions, bolstering computer storage product requirements. These factors are favorable for prominent industry players like Super Micro Computer, NetApp, Western Digital and Pure Storage.
The democratization of higher internal memory smartphones, faster Internet speed and 5G will likely act as a tailwind for industry participants. The 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, cautious IT spending amid global macroeconomic turbulence is a significant headwind in the near term, along with volatile supply chain dynamics and inflation.
Industry Description
The Zacks Computer-Storage Devices industry houses companies that design, develop, manufacture and market various hard disk drives (HDDs) and solid-state drives (SSDs). These drives are utilized in PCs, laptops, mobiles, servers, network-attached storage (NAS) devices, video game consoles, digital video recorders and other consumer electronic devices. A few industry participants, including Pure Storage, provide software-defined all-flash solutions that are uniquely fast and cloud-capable for customers.
Many industry players offer high-performance modular memory subsystems, mount and blade server systems, enterprise storage and data management software and hardware products and services. Some industry participants also provide purpose-built servers for storing and accessing data over a shared network or the Internet.
4 Trends Shaping the Computer-Storage Industry's Future
New Normal Trends & Rapid Implementation of 5G Opening New Business Avenues:. The accelerated deployment of 5G and rebound in the smartphone market will likely propel the industry to newer heights. Extensive implementation of cloud computing solutions, increased Internet usage and rapidly growing media and regulatory compliance have led to a data explosion for enterprises.
Implementation of hybrid work models has triggered the demand for data-intensive applications like video conferencing and cloud services. Adequate storage is essential for harnessing data and is expected to raise demand for high-storage capable SSDs and internal memory in advanced smartphones.
Innovation in Cloud Storage Technologies to Drive Adoption: Broader storage options from collocated hardware (such as hard disks and tape drives) to many cloud storage solutions have put the industry on a growth trajectory. The industry players are well poised for growth owing to a rapid increase in data, the complexity of data formats and the need to scale resources at regular intervals.
These companies rely on Artificial Intelligence for IT Operations (AIOps) and machine learning (ML) to manage and optimize storage solutions. To streamline data storage, companies are relying on virtualization technologies.
As more data is added from IoT, 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 has bolstered the deployment of high-capacity mass storage products, a positive for industry players.
Macro Headwinds May Prove a Drag on IT Spending in the Near Term: Weakening IT spending amid global macroeconomic weakness is likely to remain a headwind in the near term. Increased budget scrutiny, especially cloud-cost optimization by clients, and forex volatility are affecting the top-line performance of the industry participants. Consumer spending cuts on purchasing PCs, tablets and printers will likely hinder IT spending growth.
In the long run, higher technology spending on transformation projects, including data security, application modernization, analytics and AI by enterprises, augurs well for industry participants. Per a report from Gartner, worldwide IT spending is now projected to reach $5 trillion in 2024, calling for an increase of 6.8% from 2023 levels. This is below the earlier projection of 8% growth by the research firm. The report also highlighted that although generative AI had enough hype, it will not have a material impact on IT spending in the near term.
Slowing Momentum in PC Shipments Might Hinder Growth Prospects: Worldwide PC shipments declined 14.8% year over year to 241.8 million units in 2023, according to the data compiled by Gartner. PC shipments increased 0.3% in the fourth quarter. Gartner expects the PC market to return to growth in 2024, though component price hikes and geopolitical and economic uncertainties remain concerns.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Computer Storage is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #52, which places it in the top 21% of more than 250 Zacks industries.
The group’s ZacksIndustry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright 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.
Before we present a few stocks 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 Both S&P 500 and the Sector
The Zacks Computer-Storage Devices industry has outperformed the S&P 500 composite index and the broader sector in the past year.
The industry has surged 105.1% in this period compared with the S&P 500’s rise of 22.6%. The broader sector has gained 46.9% 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 22.33X compared with the S&P 500’s 20.87X. It is below the sector’s forward-12-month P/E of 26.89X.
In the past five years, the industry has traded as high as 183.94X and as low as 11.21X, with the median being 16.94X.
3 Computer-Storage Devices Stocks to Add to Watchlist
Super Micro Computer: This San Jose, CA-based company is a total IT solution manufacturer for AI, Cloud, Storage and 5G/Edge technologies. SMCI’s rack-scale plug-and-play Total AI and IT Solutions (especially the Deep-Learning and LLMoptimized ones based on NVIDIA HGX-H100) are gaining strong traction. The company’s next-generation AI and CPU platforms are driving higher design wins, orders and backlog. Increasing demand for AI inferencing systems and mainstream compute solutions bodes well.
The company recently reported second-quarter fiscal 2024 results wherein revenues jumped 103% on a year-over-year basis to $3.66 billion. Revenues from enterprise/channel vertical came in at $1.48 billion (representing 40% of revenues), up 55% year over year and owing to enterprise AI and CPU upgrade programs.
Driven by strong quarterly results, management raised the fiscal year 2024 revenue outlook to $14.3 billion to $14.7 billion from $10-$11 billion.
SMCI carries a Zacks Rank #1 (Strong Buy) currently. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for fiscal 2024 earnings per share for the company improved to $21.70 from $16.88 per share in the past 60 days. Shares have risen 717.7% in the past year.
Western Digital: It is a leading developer and manufacturer of data storage devices and solutions based on NAND flash and hard disk drive technologies. Based in San Jose, it provides a broad range of HDD and Flash storage solutions used in desktop PCs, servers, network-attached storage devices, video game consoles, digital video recorders and a host of other consumer electronic devices.
Western Digital recently reported better-than-expected second-quarter fiscal 2024 top and bottom-line performance. The company is witnessing increasing demand for nearline HDD offerings. It shipped 1 million UltraSMR hard drives per quarter in both the first and second quarters of fiscal 2024. It highlighted that WD_BLACK gaming SSD products reported strong revenue growth due to bit shipment growth of over 50% year over year in the fiscal second quarter.
The Flash business segment benefited from the dynamic allocation of bit shipments, which resulted in an improvement in ASPs and gross margins. It remains focused on managing bit shipments to align supply and inventory with demand trends.
However, weakness in global macro-economic conditions, stiff competition, customer concentration and highly leveraged balance sheet continue to remain concerns.
Western Digital carries a Zacks Rank #2 (Buy) currently.
The Zacks Consensus Estimate for fiscal 2024 has improved to a loss of $2.15 per share from a loss of $3.28 per share in the past 60 days. Shares have risen 32% in the past year.
NetApp: This San Jose-based company provides enterprise storage as well as data management software and hardware products and services. The company assists enterprises in managing multiple cloud environments, adopting next-generation technologies like AI, Kubernetes, and contemporary databases, and navigating the complexity brought about by the quick development of data and cloud usage.
NTAP remains well-poised to gain from data-driven digital and cloud transformations. Frequent product launches, and secular trends in Generative AI and high-performance computing bode well. Extensive cost discipline and new go-to-market measures, along with a focused approach to boosting storage and cloud business, are added positives.
Currently, NetApp’s performance is affected by a weak IT spending environment amid macroeconomic turbulence. Despite soft macroeconomic conditions, management raised the full-year outlook due to strength in product and hyper-scaler first-party and marketplace services. NetApp now expects fiscal 2024 revenues to inch down 2% year over year compared with the earlier projection of a decline in the mid-to-low single-digit range.
NetApp carries a Zacks Rank #3 (Hold) currently. The Zacks Consensus Estimate for fiscal 2024 earnings has remained unchanged at $6.16 per share in the past 30 days. Its long-term earnings growth rate is pegged at 8.8%. Shares have risen 32.7% in the past year.
Pure Storage: Headquartered in Mountain View, CA, Pure Storage provides software-defined all-flash solutions that are uniquely fast and cloud-capable for customers.
Pure Storage’s performance is benefiting from the strong uptake of the FlashBlade portfolio (including FlashBlade//E) coupled with robust Evergreen//One subscription sales. The company expects Evergreen//One and Evergreen//Flex solutions to generate revenues of $400 million in fiscal 2024. Increased customer adoption of Portworx storage software for databases, messaging and logging systems is a tailwind.
However, the company expects fiscal 2024 revenues to be affected by the nonfulfillment of a $41 million non-cancelable product order until next year with a Telco customer. Also, volatile macroeconomic conditions and stiff competition in the flash-based storage market remain concerning.
Pure Storage carries a Zacks Rank #3 currently. The Zacks Consensus Estimate for fiscal 2024 earnings has remained unchanged at $1.37 per share in the past 60 days. Its long-term earnings growth rate is pegged at 15.5%. Shares have risen 45.2% in the past year.
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NetApp, Inc. (NTAP) : Free Stock Analysis Report
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Pure Storage, Inc. (PSTG) : Free Stock Analysis Report
