3 storage device stocks to watch in a booming industry

The Zacks computing storage device industry is benefiting from encouraging trends in PC shipments and strong momentum in cloud computing, Internet of Things (IoT), automotive, connected devices, virtual reality and artificial intelligence (AI). These factors increase the need for robust data storage solutions, driving the demand for computer storage products. This promotes prospects from prominent industry players like NetApp NTAP, western digital WDC and Pure storage PSTG. The democratization of smartphones with higher internal memory, faster internet speed and 5G are likely to act as a tailwind for industry players. The rapid deployment of 5G networking is driving the proliferation of IoT devices, Advanced Driver Assistance Systems (ADAS), and Augmented Reality/Virtual Reality (AR/VR). However, the negative impacts resulting from pandemic-triggered supply chain disruptions and component shortages are of concern in the near term.

Description of the industry

The Zacks computer storage device industry includes companies such as Western Digital that design, develop, manufacture and market a wide range of hard disk drives (HDDs) and solid-state drives (SSDs) used in PCs, computers laptops, mobiles, servers, networks. attached storage devices (NAS), video game consoles, digital video recorders and a host of other consumer electronics. Some of the industry players, including Pure Storage and NetApp, offer software-defined all-flash solutions that are particularly fast and cloud-ready for customers. Others offer high-performance memory subsystems, mounted and blade server systems, enterprise data storage and management software, and hardware products and services. Some of the industry players provide specially designed servers to store and access data on a shared network or through the Internet.

4 trends shaping the future of the computing and storage industry

New normal trends and rapid implementation of 5G opening up new business avenues: Coronavirus-driven work-from-home and work-from-home trends along with the implementation of a hybrid working model have sparked demand for data-intensive applications like video conferencing and cloud services. Efficient storage is essential for successful data operation and is expected to increase the demand for high storage capacity SSDs and internal memory in advanced smartphones. The accelerated deployment of 5G and the rebound in the smartphone market are expected to propel the industry to new heights. Extensive implementation of cloud computing solutions, increased internet usage, and growing media and regulatory compliance, driven by the coronavirus-led work-from-home setup, have led to a data explosion for businesses, which bodes well for industry players.

Innovation in cloud storage technologies to drive adoption: The extensive use of storage options ranging from collocated hardware (such as hard drives and tape drives) to a multitude of cloud storage solutions has set the industry on a growth trajectory. Industry players are well positioned to grow due to a rapid increase in the amount of data, the complexity of data formats, and the need to scale resources at regular intervals. Companies are increasingly relying on artificial intelligence for IT operations (AIOps) and machine learning (ML) to manage and optimize storage solutions. To rationalize data storage, companies rely on virtualization technologies. As more and more data is accumulated from the IoT, enterprises are turning to edge computing architecture to reduce latency and increase flexibility. In particular, 49% of the 175 ZB data produced in 2025 should be stored in the cloud. Kubernetes storage is becoming increasingly popular as it facilitates greater agility and scalability. This, in turn, has boosted the deployment of high-capacity mass storage products, which is positive for industry players.

Expectations of increased IT spending: According to a Gartner report, global IT spending is expected to rise 5.1% from 2021 levels and reach $4.5 trillion in 2022. The rise will be driven by higher technology spending as companies focus on long-term projects, the report adds. However, the situation remains unstable with the emergence of a more contagious Omicron variant. Several parts of the world (Australia, UK and Europe) and parts of the USA are affected by outbreaks of Omicron variants. This will likely affect spending by small and medium-sized businesses around the world. Uncertainty about corporate visibility could hurt industry performance in the short term.

Slowing PC shipments could hamper growth prospects: After recording six consecutive quarters of volume growth, global PC shipments fell 5% to 88.4 million units in the fourth quarter of 2021, according to the latest data compiled by Gartner. The latest report from Gartner describes the end of the massive surge in PC demand due to the wave of online and home learning caused by the pandemic. Supply chain and component shortages will likely act as a short-term headwind. However, the report added that PC shipment volumes would remain above pre-pandemic levels for the next two to three years. The market will be relatively healthy thanks to the increase in average selling prices.

Zacks’ Industry Rankings Indicate Bright Prospects

Zacks computing storage is housed within the broader Zacks computing and technology sector. It carries a Zacks Industry Ranking of #77, which places it in the top 31% of over 250 Zacks industries.

The group’s Zacks Industry Rank, which is essentially the average Zacks Rank of all member stocks, indicates a bright near-term outlook. Our research shows that the top 50% of industries ranked by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

Before outlining a few stocks you might want to consider for your portfolio given the promising outlook, let’s take a look at recent stock market performance and the picture of industry valuations.

The industry is lagging the sector and the S&P 500

The Zacks computer storage device industry has underperformed the broader sector as well as the Zacks S&P 500 composite over the past year.

The industry gained 7% during this period compared to the 19.4% growth of the S&P 500. Notably, the broader sector posted a return of 7.4% during the same period.

Year-over-year price performance

Current industry assessment

Based on the 12-month P/E (or price/earnings) which is a multiple commonly used to value computer storage device companies, we see that the sector is currently trading at 13.10X against the 20, 35X of the S&P 500. It is also below the sector’s forward 12-month P/E of 25.81X.

Over the past five years the industry has traded as low as 20.8X and as low as 10.43X with the median at 14.54X as shown in the charts below.

Forward 12-Month Price-to-Earnings (P/E) Ratio

12-month forward price-to-earnings ratio

3 stocks of computer storage devices to add to the watchlist

NetApp benefited from the continued strength of the Hybrid Cloud and Public Cloud segments as well as strong billing growth. The growing weight of all-flash cloud-integrated solutions; File, block and object software products; and multi-cloud offerings bode well.

The rapid adoption of Microsoft Azure NetApp Files is a tailwind. Synergies from recent acquisitions of Data Mechanics, Spot, Cloud Jumper and Talon Storage bode well for this Zacks Rank #2 (Buy) company. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NetApp shares have gained 33.6% over the past year. Zacks’ consensus estimate for the company’s fiscal 2022 earnings improved 1 cent to $5.06 per share over the past 30 days. Additionally, its long-term earnings growth rate is pegged at 8.8%.

Pricing and Consensus: NTAP

western digital is experiencing increased demand from cloud customers and a recovery in the enterprise application and video and image application markets. In the last quarter, cloud end-market revenue (39.7% of total revenue) grew 89% year-over-year to $1.92 billion.

Strong demand for 18 terabyte and 20 TB power-assisted drives and enterprise solid-state drives (SSDs) is expected to drive revenue. Demand for the WD Black product line is strong due to gamers’ preference for more personalized solutions. The momentum for SanDisk retail products bodes well.

Western Digital wears a Zacks rank #3 (Hold). Zacks consensus estimate for fiscal 2022 earnings stands at $8.53 per share.

Pricing and Consensus: WDC

Pure storage performance is improving thanks to the continued momentum of subscription services Pure as-a-Service, Portworx and Evergreen Storage. The company benefits from the strength of the FlashArray and FlashBlade businesses as well as strong growth prospects in the data-driven markets of AI, ML, Internet of Things (IoT), real-time analytics and simulation.

Solid adoption of Cloud Block Store, ObjectEngine Cloud, and CloudSnap bodes well in the long run.

Recently, Pure Storage collaborated with Meta Platforms to support the latter’s new AI Research SuperCluster (RSC) project. Recently, Meta unveiled RSC, touted as the tech giant’s breakthrough supercomputer for AI research. Meta will leverage the robust and scalable storage capabilities of Pure Storage to power RSC under this partnership.

Pure Storage carries a Zacks rank #3 (Hold). Shares of the company have jumped 30.7% in the past six months.

Pricing and Consensus: PSTG

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