Western Digital's Ace in the Hole

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The numbers are staggering: The growth in cloud computing, enterprise-related products, and the software-as-a-service markets are expected to grow dramatically over the course of the next several years. Why? Because it's not only businesses that are making the transition to cloud and enterprise-based solutions; your average mobile computing user is also accessing data centers, whether they know it or not.

When it comes to enterprise hard drives, the guts of the enterprise market, two names dominate: Seagate Technology (NASDAQ: STX  ) and Western Digital (NASDAQ: WDC  ) . Sure, $51-billion EMC (NYSE: EMC  ) dabbles in the enterprise storage, virtual security and devices markets, but it has its fingers in a number of other pies. EMC or no EMC, the enterprise market, according to industry research firm IHS, is dominated by Seagate and its 48% market share, along with Western's 45%.

What's at stake
Though Western has slowly eaten away at Seagate's share in the enterprise market, dethroning it hasn't happened -- yet. And the opportunities for both Western and Seagate are huge – revenues in the enterprise cloud computing market could jump to $67 billion by 2016, according to IDC reports. The servers running data centers alone are expected to reach nearly $10 billion in annual sales by 2015, and they all need fast, energy efficient, and high-capacity hard drives.

Western vs. Seagate
From a financial perspective, neither Western nor Seagate are hurting and, with growth projected in their key markets in 2013, and beyond, their strong financials aren't likely to change. With that said, Western's financial statement more than holds its own compared to Seagate.

Both have sound balance sheets, though Seagate's $2.37 billion in cash is "paltry" compared to Western's $3.5 billion. Seagate's share buyback initiative approved in the spring of 2012 certainly made a dent in its cash position and, with fewer shares outstanding, shareholders should (at least in theory) continue to see share price appreciation.

A key differentiator between the two -- particularly if you're a fan of lean, low-debt companies -- is Western's $1.9 billion in long-term debt, which is equal to about half its cash pile. By comparison, Seagate has nearly $400 million more in long-term debt than it does in cash. If and when Western uses some of that cash to bump its 2.3% dividend up to better compete with Seagate's 4.8%, shareholders would likely see an immediate pop in share price, adding to Western's nearly 40% rise in value during the past six months.

Western's Ace in the Hole
You don't have to be a computer hardware, cloud computing, or enterprise services geek to know the primary concerns in the hard drive industry is energy efficiency, speed, and capacity -- not necessarily in that order. If Western keeps to its proposed schedule, Q4 of 2013 should be an exciting one for its clients and shareholders. Why? Helium. That same lighter-than-air gas in your birthday balloons is the basis for Western Digital's new line of hard drive disks, slated for introduction the end of this year. According to IHS, Western's new disks could be the impetus that puts it over the top; in this case, unseating Seagate as No. 1 in the market.

According to Western, the new disks will reduce power use by as much as 20%, support up to six terabytes (about 50% more than current, commercial hard drive disks), all while reducing the size of the disk by 30% compared to those "old fashioned" hard drive disks. Sure, industry-leading Seagate will explore its own helium hard drive disk solution, but Western will be first, having already conquered some difficult manufacturing issues.

If the helium disk drive market comes anywhere close to IHS's projected 100-million units by 2016, Western Digital's ace in the hole will finally get it where it longs to be -- looking down at Seagate.

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