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Morningstar | Seagate Technology is a major player in the hard disk drive market.

Seagate Technology is a major player in the hard disk drive market. The firm has been under duress in recent years as the storage industry has been transitioning to solid-state drives. SSDs are faster and more reliable than HDDs and have been replacing HDDs across PCs and servers. Although HDDs continue to boast superior cost metrics and higher capacities, SSDs have been closing these gaps. Seagate has not pursued SSD development as aggressively as its larger peer Western Digital has, focusing instead on the enterprise side of HDD demand.HDDs remain prominent in data centers to fulfill the high-capacity storage needs of hyperscale cloud vendors and other enterprises generating large swaths of data. The acceleration of cloud deployments should benefit Seagate, so long as it is able to keep driving capacities higher and costs lower. However, we note both Seagate and Western Digital are targeting a shrinking pie, as SSDs are also encroaching on HDD territory in servers.We see significant secular headwinds for Seagate’s traditional HDD demand in PCs, stemming from an ongoing decline in annual PC unit sales and shift to SSDs. Also, the SSD space is considerably more competitive than the HDD market. While Seagate should mitigate HDD unit declines with a richer mix skewed to higher-margin enterprise drives, we do not foresee enterprise HDD demand fully offsetting headwinds from SSD substitution, leading to declining revenue going forward. Ultimately, we remain skeptical that Seagate will generate sustainable excess returns on invested capital, leading to our no-moat rating.Although Seagate sells SSDs, these products do not represent a meaningful portion of its total revenue and do not currently align with the company's long-term strategy. In contrast, rival Western Digital acquired SanDisk to secure a captive source of NAND flash vital to SSDs. Seagate currently sources NAND from a supply agreement with Micron and recently signed a long-term supply agreement with Toshiba. Every other prominent SSD supplier (Samsung, Intel, Western Digital, Micron, and so on) has its own internal NAND supply, which allows some form of differentiation.