3 storage device stocks to watch in a thriving 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 are driving the demand for rugged data storage solutions, bolstering the demand for computer storage products. This promotes prospects from prominent industry players like Pure storage PSTG, super microcomputer SMCI and netlist NLST. 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 that design, develop, manufacture, and market a wide variety of hard disk drives (HDDs) and solid-state drives (SSDs). These drives are used in PCs, laptops, mobiles, servers, network attached storage (NAS) devices, video game consoles, digital video recorders and other consumer electronics. A few industry players, including Pure Storage, offer software-defined all-flash solutions that are particularly fast and cloud-enabled for customers. In addition, many industry players like Netlist offer high-performance modular memory subsystems, mounted and blade server systems, enterprise data storage and management software, and hardware products and services. Some industry players also provide specially designed servers to store and access data on a shared network or via the Internet.

4 trends shaping the future of the computing and storage industry

New normal trends and rapid 5G implementation opening up new business avenues: Coronavirus-induced work from home and the implementation of a hybrid work model have sparked demand for data-intensive applications like video conferencing and cloud services. Efficient storage is essential to operate data properly and is expected to increase the demand for SSDs and high storage capacity 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 numerous 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 rely 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. Kubernetes storage is becoming increasingly popular as it facilitates greater agility and scalability. This has boosted the deployment of high-capacity mass storage products, which is positive for industry players.

Expectations of increased IT spending: According to a report by Gartner, global IT spending is expected to rise 4% from 2021 levels and reach $4.4 trillion in 2022. Rising technology spending will drive the upside as companies continue to build a solid technological infrastructure. While geopolitical disruptions, inflationary pressures and protracted pandemic-induced supply chain issues remain major concerns, these factors are unlikely to affect the global recovery seen in IT spending, according to Gartner. This bodes well for the industry’s performance.

Slowing PC shipments could hamper growth prospects: Global PC shipments fell 6.8% to 77.9 million units in the first quarter of 2022, 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. In the first quarter, sales were impacted by declining Chromebook sales as schools began to reopen. A slowdown in the PC market does not bode well for industry players.

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 #105, which places it in the top 42% of over 252 Zacks industries.

The group’s Zacks Industry Rank, which is 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.

Industrials outperforms sector but lags S&P 500

The Zacks computer storage device industry has outperformed the broader sector, but has lagged the Zacks S&P 500 composite over the past year.

The industry lost 10.9% during this period compared to the 6.2% decline in the S&P 500. The broader sector fell 18.1% during the same period.

Year-over-year price performance

Current industry assessment

Based on the 12-month forward 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 11.82X against 17.24X of the S&P 500. It is also below the sector’s forward 12-month P/E of 20.96X.

Over the past five years the industry has traded as low as 20.8X and as low as 10.43X with the median at 14.49X 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

super microcomputer: The San Jose, Calif.-based company designs, develops, manufactures and sells energy efficient server solutions optimized for applications based on the x86 architecture. The company’s solutions include a range of blade and rack-mount server systems and components. Super Micro also produces server boards, chassis and server systems.

In the last reported quarter, the company’s revenue of $1.36 billion jumped 51.3% year-over-year. For fiscal year 2022 (ending June 30, 2022), the company now expects net sales to be between $4.2 billion and $4.6 billion, compared to the previous guidance of $4.96 billion. $5.04 billion.

Shares of Super Micro Computer, which sports a Zacks No. 1 ranking, have gained 49.2% over the past year. You can see the full list of today’s Zacks #1 Rank stocks here.

Zacks’ consensus estimate for the company’s fiscal 2022 earnings improved 42.5% to $4.56 per share over the past 60 days.

Pricing and Consensus: SMCI

Netlist: The Irvine, Calif.-based company designs and produces high-performance modular memory subsystems for a wide variety of industries in various verticals.

The company’s memory subsystems are developed for applications where memory plays a key role in overall system performance. These applications include tower servers, rack-mount servers, blade servers, high-performance computing clusters, engineering workstations, and telecommunications switches.

Currently, Netlist carries a Zacks Rank #2 (Buy). Netlist shares have gained 107.6% over the past year. Additionally, its long-term earnings growth rate is pegged at 15%.

Pricing and Consensus: NLST

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

Recently, Pure Storage has collaborated with companies such as Snowflake, Kyndryl, and Amazon Web Services to further expand its technology portfolio. For the first quarter of fiscal 2023, Pure Storage’s total revenue increased 50% from the prior year quarter to $620.4 million. During the first fiscal quarter, Pure Storage added 360 customers. The company’s customer base includes 54% of Fortune 500 companies.

Pure Storage carries a Zacks rank #3 (Hold). Shares of the company have jumped 45.4% over the past year. Zacks’ consensus estimate for the company’s fiscal 2023 earnings improved 1.1% to 88 cents per share over the past 60 days. Additionally, its long-term earnings growth rate is pegged at 18.5%.

Pricing and Consensus: PSTG

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