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Motley Fool investment site discovers SSDs, gets it wrong

2 Aug 2010 • 2 minute read
The Motley Fool, a famous investment book turned Web site (www.fool.com) just posted a short article quoting Fool.com investment analyst Eric Bleeker on the undervalued stocks of hard-drive vendors Seagate and Western Digital. Bleeker says in the short embedded video that the two HDD vendors’ stocks are undervalued due to the very low price/earnings ratios the stocks are trading at. In the video, Bleeker then says that the two storage companies are in a great business at the moment although there are some concerns about some future technologies that threaten the HDD business. The online text article elaborates and says that the threatening technology is solid-state disk (SSD) technology.

This view into the tech investing world is yet again an example of how distant stock analysts have become from the underlying business of the stocks they follow. Seagate and Western Digital are indeed great HDD vendors. They’re really the leaders in the area (plus Hitachi). However, in my mind the HDD vendors are not at all threatened by SSDs. Any one of them could be going full tilt in the SSD business by, oh let’s say tomorrow, if need be. Seagate recently introduced the hybrid Momentus XT HDD/flash-cache that fuses a 7200-RPM HDD with NAND Flash memory to create a drive with near-SSD speeds and HDD price/bit storage. In addition to being a leading HDD vendor, Seagate and Western Digital are already SSD vendors, respectively marketing the Pulsar and the SiliconEdge Blue lines of SSDs.

In the HDD business, the bar to entry was once the precision mechanical machining and assembly needed to create leading-edge drives. However, that bar to entry didn’t prevent the HDD industry from ballooning to more than 200 vendors at one point during the 1980s. Then the bar to entry was the manufacture of advanced thin-film and GMR heads. Now we’re down to a handful of vendors and the bars to entry are crazy-high volumes, razor-thin margins, distribution arrangements, and most important the existing customer lists. SSDs being another sort of storage animal try to enter a slightly different storage market with a disjoint but somewhat overlapping set of storage customers. That new set of customers coupled with the very low cost of entry with respect to SSD manufacturing opened a window of opportunity for wannabe storage vendors. (Any good contract manufacturer can build SSDs once the design has been completed or purchased.) Seagate and Western Digital can start to close that window whenever they feel it’s financially advantageous.

So I doubt that Seagate and Western Digital feel threatened by a market they could choose to own. Perhaps this is an example of premeditated timing. Perhaps it’s a classic example of Clayton Christensen’s Innovator’s Dilemma (http://www.claytonchristensen.com/). Who knows? As far as Seagate’s and Western Digital’s stocks being bargains--I’ll leave that commentary to the self-avowed fools at www.fool.com.

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