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Morningstar | We're Maintaining Our Chipmaker FVEs, as We Don't Yet Foresee a Tech Cold War Despite the Huawei Ban

Seagate Technology is one of two leaders in the hard disk drive, or HDD, market. However, as the storage industry has been transitioning to solid-state drives, or SSDs, that leadership has provided less benefit. Flash technology enables SSDs to have better and more reliable performance than the older spinning disc media and as a result, HDDs have lost their luster for both PCs and servers. While HDDs currently have superior cost metrics and higher capacities, SSDs have been closing these gaps and quickly limiting the number of use cases for HDDs. We believe Seagate has intangible assets within the HDD space, as well as cost advantage in manufacturing them, but these competitive advantages are unlikely to generate excess returns on capital over the next decade as that storage solution continues to decline. In our view, the firm does not have an economic moat.We believe that HDDs will remain a significant component of the storage environment to accommodate the business-critical storage needs of enterprises generating large swaths of data. However, SSDs have already made significant headway in the enterprise market by taking a major portion of the share in mission critical applications. Similarly, we do not think the significant secular headwinds against HDD demand in PCs will subside. With a lower total cost of ownership from SSD products in many PC applications, we anticipate there will be an ongoing decline in annual HDD sales as SSDs increase share and as PC unit sales generally decline.Seagate has been slow to make the move into SSDs in general, which we believe has left them comparatively weaker. It does sell SSDs and flash products, but these do not yet contribute meaningfully to total revenue. While rival Western Digital acquired SanDisk, Seagate has only recently secured a reliable source of NAND through its own agreement with Toshiba. Seagate’s strength in enterprise HDDs, along with the increasing average selling prices for high capacity drives in business-critical storage, should help offset some of the HDD unit declines within consumer markets but we do not foresee enterprise HDD demand fully offsetting the broader technological headwinds.