One sometimes-overlooked aspect of the artificial intelligence (AI) trend is that nearly every aspect of the technology, from training to inference to physical AI, creates data that needs to be stored on hard disk drives.
Two major U.S. technology companies that supply those resources are Western Digital (WDC +1.43%) and Seagate Technology (STX +2.05%). Their shares are up by around 190% and 200%, respectively, year to date, and it appears their growth cycles are still ramping up. Analysts' average price target for Western Digital is around 9% higher than its current price, while Seagate's average price target is about 5% higher than it is trading today.
Here are three reasons I like each stock.
Image source: Getty Images.
1. Growth of data center demand
While the early AI hype focused heavily on the computing power required to handle such systems, the market is coming to realize that AI is extremely data-heavy. Large language models (LLMs) require astronomical amounts of storage to house training data, logs, and synthetic data outputs.
Western Digital is seeing explosive demand from hyperscale cloud data center clients. In its third-quarter earnings call, management noted that 100% of its 2026 hard disk drive (HDD) production capacity is sold out, backed by multiyear purchase agreements that will extend through 2028 and 2029.
Seagate can manufacture 550 exabytes of data storage annually, but that's not enough to keep up with demand either. The company said that its nearline exabyte capacity is largely allocated and locked in through 2027, with strategic planning stretching into 2028. These build-to-order contracts give the company a rare degree of visibility into its future revenue streams.
NASDAQ: WDC
Key Data Points
2. Strong pricing power and improved margins
Because data center clients are racing to secure hardware faster than it can be manufactured, the whole tech industry is experiencing shortages of storage hardware. This supply crunch gives both companies immense pricing power.
In its fiscal 2026 third quarter, which ended April 3, Western Digital reported revenue of $3.34 billion, up 45%, year over year. Gross margins jumped past 50%, leading to net income rising by 516% to $3.2 billion. EPS rose to $8.20, up 201% year over year.
Seagate had similarly strong numbers in its fiscal third quarter, which likewise ended April 3. Revenue was $3.1 billion, up 44% year over year, while its gross margin rose by 1030 basis points to 46.5%. Net income rose 120% to $748 million, and EPS was up 108% to $3.27.
NASDAQ: STX
Key Data Points
3. Clear technology roadmap and strong capital returns
Western Digital is maintaining its industry lead through next-generation, high-capacity drive innovations, successfully advancing its energy-assisted magnetic recording (ePMR) and heat-assisted magnetic recording (HAMR) technologies to deliver higher-density UltraSMR drives with capacities up to 32 terabytes. The company is also developing high bandwidth drive and dual pivot technologies to maximize throughput for intensive AI workloads.
This technological execution is translating into massive free cash flow. Western Digital has aggressively improved its balance sheet to a net cash position, allowing management to reward shareholders. Western recently raised its quarterly dividend by 20% and authorized an expansive $4 billion share-repurchase program.
Seagate was an early adopter of HAMR and maintains an edge in HAMR sales through its Mozaic drive platform. It has qualified and deployed these ultra-high-capacity drives (32 terabytes and above) to roughly 75% of leading global cloud service providers. The tech allows hyperscalers to upgrade their data centers' capacities without expanding their physical footprints or power grid connections.
Like Western Digital, Seagate is benefiting from its strong cash position of $1.1 billion, up 40% from the same quarter a year ago. In its fiscal Q3, it retired $641 million in debt and returned $191 million to shareholders through dividends and share repurchases. Its board also approved an additional stock buyback program of up to $5 billion. The company raised its quarterly dividend by 3% this year to $0.74 per share.
Western Digital has a slight edge
Between the two, Western Digital trades at lower valuations right now, both on a trailing and a forward basis. It's also in a better position regarding debt.
While Seagate has an edge in technology, Western Digital appears to be catching up, and it has higher margins. Both companies are solid choices, but I feel Western has more momentum for now. Seagate's share price run-up this year makes the stock less of a buy.
