For Immediate Release
Chicago, IL – February 3, 2022 – Today, Zacks Equity Research discusses NetApp NTAP, Western Digital WDC and Pure Storage PSTG.
Industry: Computer - Storage
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The Zacks Computer-Storage Devices industry is benefitting from encouraging trends in PC shipments and solid momentum in cloud computing, Internet of Things (IoT), auto, connected devices, virtual reality and Artificial Intelligence (AI). These factors propel the requirement for robust data storage solutions, bolstering the demand for computer storage products. This is favoring the prospects of prominent industry players like NetApp, Western Digital and Pure Storage.
Democratization of higher internal memory smartphones, faster Internet speed and 5G is likely to act as a tailwind for the industry participants. 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, negative impacts stemming from the pandemic-triggered supply chain disruptions and component shortages are a concern in the near term.
Industry Description
The Zacks Computer-Storage Devices industry comprises companies like Western Digital that design, develop, manufacture and market a broad range of hard disk drives (HDDs) and solid-state drives (SSDs) utilized in PCs, laptops, mobiles, servers, network-attached storage (NAS) devices, video game consoles, digital video recorders and a host of other consumer electronic devices.
Some of the industry participants, including Pure Storage and NetApp, provide software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. There are others that offer high-performance memory subsystems, mount and blade server systems, enterprise storage and data management software along with hardware products and services. Some of the industry players provide purpose-built servers used for storing and accessing data over a shared network or through the Internet.
4 Trends Shaping the Future of the Computer - Storage Industry
New Normal Trends & Rapid Implementation of 5G Opening New Business Avenues:Coronavirus-induced work-from-home and stay-at-home trends along with the implementation of hybrid work model have triggered demand for data-intensive applications like video conferencing and cloud services. Effective storage is essential for the proper harnessing of data and is expected to raise demand for high storage capable SSDs and internal memory in advanced smartphones.
Accelerated deployment of 5G and rebound in the smartphone market is likely to propel the industry to newer heights. Extensive implementation of cloud computing solutions, increased Internet usage and rapidly-growing media and regulatory compliance, driven by coronavirus-led work-from-home setup, have led to data explosion for enterprises, which bodes well for the industry participants.
Innovation in Cloud Storage Technologies to Drive Adoption: Extensive use of storage options from collocated hardware (such as hard disks and tape drives) to a multitude of cloud storage solutions has put the industry on a growth trajectory. The industry players are well poised for growth on the back of a rapid increase in the amount of data, the complexity of data formats and the need to scale resources at regular intervals.
The companies are increasingly relying 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 gets amassed from IoT, the companies are turning to edge computing architecture to reduce latency and boost flexibility. Notably, 49% of the 175 ZB data produced in 2025 is projected to be stored in the cloud.
Kubernetes storage is becoming increasingly popular as it facilitates greater agility and scalability. This, in turn, has bolstered the deployment of high-capacity mass storage products, which is a positive for industry players.
Expectations of an Increase in IT Spending: Per a Gartner report, worldwide IT spending is expected to increase 5.1% from 2021 levels and reach $4.5 trillion in 2022. The upside will be driven by higher technology spending as enterprises focus on long-term projects, added the report. However, the situation remains unstable with the emergence of a more contagious Omicron variant.
Several parts of the world (Australia, the U.K. and Europe) and parts of the United States are afflicted by the Omicron variant outbreaks. This is likely to affect spending across small- and medium-sized businesses globally. The uncertainty in business visibility could put a dent on the industry’s performance in the near term.
Slowing Momentum in PC Shipments Might Hinder Growth Prospects: After registering six consecutive quarters of volume growth, worldwide PC shipments dropped 5% to 88.4 million units in the fourth quarter of 2021, according to the latest data compiled by Gartner. The latest Gartner report depicts the end of the massive spike in PC demand due to the pandemic-led work-from-home and online learning wave. Supply chain and component shortages will likely act as a headwind in the near term. However, the report added that the PC shipment volumes would remain above the pre-pandemic levels for the next two to three years. The market will be relatively healthy owing to increases in average selling prices.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Computer Storage is housed within the broader ZacksComputer And Technology Sector. It carries a Zacks Industry Rank #77, which places it in the top 31% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically 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 that 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 Lags Sector and S&P 500
The Zacks Computer-Storage Devices industry has underperformed the broader sector as well as the Zacks S&P 500 composite in the past year.
The industry has gained 7% over this period compared with the S&P 500’s growth of 19.4%. Notably, the broader sector has returned 7.4% 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 13.10X compared with the S&P 500’s 20.35X. It is also below the sector’s forward-12-month P/E of 25.81X.
In the past five years, the industry has traded as high as 20.8X and as low as 10.43X, with the median being 14.54.
3 Computer-Storage Devices Stocks to Add to Watchlist
NetApp is benefiting from continued strength in the Hybrid Cloud and Public Cloud segments as well as robust billings growth. The growing clout of cloud-integrated all-flash solutions; File, Block and Object Software products; and multi-cloud offerings augurs well.
Rapid adoption of Microsoft Azure NetApp Files is a tailwind. Synergies from the recent acquisitions of Data Mechanics, Spot, Cloud Jumper and Talon Storage bode well for this Zacks Rank #2 (Buy) company. You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Shares of NetApp have gained 33.6% in the past year. The Zacks Consensus Estimate for fiscal 2022 earnings for the company improved by 1 cent to $5.06 per share in the past 30 days. Moreover, its long-term earnings growth rate is pegged at 8.8%.
Western Digitalis witnessing higher demand from cloud customers and recovering enterprise and video and image application markets. In the last reported quarter, revenues from the Cloud end market (39.7% of total revenues) increased 89% year over year to $1.92 billion.
Robust demand for 18-terabyte and 20TB energy-assisted drives and enterprise solid-state drives (SSDs) is expected to drive the top line. Demand for the WD Black product line is strong due to gamers’ preference for more customized solutions. Momentum in SanDisk retail products bodes well.
Western Digital carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for fiscal 2022 earnings stands at $8.53 per share.
Pure Storage performance is gaining from continued momentum in Pure as-a-Service, Portworx and Evergreen Storage subscription services. The company is benefiting from strength across 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 uptake of Cloud Block Store, ObjectEngine Cloud and CloudSnap augurs well in the long haul.
Recently, Pure Storage collaborated with Meta Platforms to support the latter’s new-age AI Research SuperCluster (RSC) project. Recently, Meta unveiled RSC, touted as the tech giant’s breakthrough supercomputer for AI research. Meta will leverage Pure Storage’s robust and scalable storage capabilities to power RSC as part of this partnership.
Pure Storage carries a Zacks Rank #3 (Hold). Shares of the company have surged 30.7% in the past six-months’ period.
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