Do not underestimate hard drives
Think technology stocks are worth earnings multiples in the 50s? Then there is one sector in technology that you should be following closely.
The hard drive industry has been thoroughly neglected for the past few years, with the advent of solid state permanent storage, such as flash, creating some great bargains for value minded investors.
Look for example at Seagate Technology (STX) whose share was battled to $13.82 a share this November, bringing the earnings multiple to around 7.5 in an industry whose earning multiple usually stands in the 20s. The stock had been brought down by Apple’s high profile switch from the disk based iPod mini to the flash based iPod nano. Sandisk (SNDK), a leading flash memory maker, has an earnings multiple of 45 right now while the entire industry is projected to make a loss in 2006.
Flash memory is of course, much ‘cooler’ technology. While hard drives started in the 1950s and looked like bulky vacuum cleaners, flash memory is young and tiny. It has no moving parts and shines where portability is a must with its low consumption and small footprint.
But hard drives are getting faster, smaller and consume far less power, and the research conducted by Seagate has a lot to do with these improvements - they have invested much in perpendicular recording which promises to increase capacity significantly. Capacity is cheap - they have outpaced even Moore’s famous law by doubling capacity roughly once every 12 months (instead of 18 months for processors and memory), making microdrives with multigigabyte capacities better choices for digital camcorders. And of course, they are far more suitable for places where portability is not an issue, like a car’s on-board computer and entertainment, your console, your television or audio system, and soon refrigerators, telephones and security cameras.
Couple these growth prospects with the excellent profits that Seagate posts, the recent acquisition of Maxtor that should give Seagate more bargaining power for the supply of raw materials, and the handsome (for a technology company) dividend the stock pays, and it should really drive you nuts how long this stock has been shunned by Wall Street.