Western Digital vs. Seagate Technologies: 7 Reasons for a Clear Leader

After more than two years of trading in tandem, Western Digital (NASDAQ: WDC  ) has created a little separation from Seagate Technologies (NASDAQ: STX  ) . But, with signs of a recovering PC segment by the likes of Hewlett-Packard (NYSE: HPQ  ) , many might think Seagate is presenting a better upside opportunity. To the contrary, there are actually seven reasons this is not the case.

A recovering PC market
According to Gartner and IDC, the global PC shipment market fell 10% over 2012; a year that also saw large declines. Needless to say, it has been a rough couple years for companies dependent on this industry, but thankfully, there have been some signs of life.

Specifically, Hewlett-Packard saw its PC revenue rise 4% year-over-year during its last quarter. This was the first time for positive growth in more than two years, and is likely largely responsible for HP's stock gains of 15.5% this year. And if continued, will likely continue to push the stock higher.

In addition, if PC sales remain strong for HP, and other manufactures, it will bode well for hard disk drive (HDD) makers Seagate and Western Digital, who combine own 85% of a market that is responsible for storing data on PCs and laptops. Yet, despite Western's 5% gain and Seagate's 5% loss this year, the disconnect does not necessarily mean that Seagate has the most to gain.

7 reasons Western Digital is the top (HDD) investment
First, Western ships more with less. Seagate has a 1.5, 3, and 4 terabyte (TB) drive, and shipped just 56.6 million units in the last quarter. Western Digital, with just 1 and 3 TB drives shipped 63.1 million units. This shows more demand for Western's products as compared to Seagate drives.

Second, Western Digital drives have a higher survival rate at 36 months of 94.8%. Seagate's is just 73.5% in a Blackblaze study. Clearly, the survival rate of a product weighs heavily in determining which are used.

Third, Seagate and Western Digital no longer control equal market share. Last year, both companies owned about 43% of the HDD market. Today, Western Digital's share sits at 45% versus Seagate's at 40%; this is not a positive trend in the favor of Seagate.

Fourth, Western Digital is becoming more efficient at a faster clip. In the January quarter, Seagate's gross margin increased 100 basis points year-over-year to 28%. In the same period, Western's rose 140 basis points to 30.1%.

Fifth, Western Digital's quarterly earnings increased 28.4% in its most recent quarter while Seagate's fell 13%. Obviously, this is a wide gap for two companies operating in a near identical industry.

Sixth, Western Digital has growth! In its last quarter, revenue grew 3.9% versus a loss of 3.8% for Seagate.

Lastly, both stocks trading at 10 times next year's earnings. This is important, because despite all of Western's improvements versus Seagate's struggles and stock decline, Western can still be purchased for the exact same multiple as its lagging peer.

Final thoughts
To be fair, Seagate is not a horrible investment. At 10 times next year's earnings, it is not expensive. Not to mention, Seagate is one of the most investor friendly companies in the market, giving back roughly 70% of operating cash flow in dividends and buybacks. However, despite these positives, it doesn't present the value or upside of Western Digital.

Essentially, the fact that Seagate is cheap simply makes Western Digital that much more attractive. This is a company that generates nearly half of its revenue from PC-related drives, and despite industry weakness, has managed to maintain growth by commanding market share and capitalizing on other opportunities.

Therefore, with HP showing us light at the end of the PC tunnel, both Seagate and Western Digital may trade higher, although Western is likely to perform significantly better.

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  • Report this Comment On March 23, 2014, at 5:54 PM, FirstHorse wrote:

    More important, Seagate is managed by a greedy salesman with focus only on squeezing more from its employees, not focusing on making a stronger business/company for a long term success!

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