Western Digital and Seagate shares bounce back as analysts downplay the Toshiba threat

By Britney Nguyen

Even if Toshiba doubles its capacity, analysts say it has a ways to go to catch up with Western Digital and Seagate

Seagate's stock was gaining back Friday's losses on Monday.

Shares of Western Digital and Seagate Technology were rebounding Monday as analysts assessed the true risk of overseas competition in the market for hard disk drives.

Both stocks fell sharply on Friday after a Nikkei Asia report discussed the potential for Japan's Toshiba (JP:6588) to significantly expand its production of this storage offering.

But while the thought of Toshiba doubling its exabyte capacity "sounds bearish" for the U.S. storage makers, TD Cowen analyst Krish Sankar said "the math is less concerning." Digital data storage is measured in exabytes, which amount to about 1 billion gigabytes.

At that rate, Toshiba would still only make up 15% to 17% of the overall HDD market, Sankar said, adding about 75 exabytes of incremental supply - far below the current 300-exabyte shortage in the industry. That also doesn't factor in Sankar's projections for exabyte demand to grow about 30% annually next year and in 2028.

Therefore, Toshiba's capacity additions are "a natural response to tightness," rather than a sign of future excess supply, Sankar said in a note to clients.

Western Digital's stock (WDC) rose 6.3% on Monday, while Seagate's (STX) gained 4.5%.

The threat also isn't immediate. Doubling exabyte production would take two years, Sankar said, pointing to the 12-month cycle time for wafers and assuming another 12 months that would be needed to build out production and install manufacturing equipment. He also noted that customers are seemingly "skeptical about [the] capacity ramp trajectory for Toshiba." The company has previously fallen short of some of its production targets.

Meanwhile, Seagate and Western Digital are moving fast on their product roadmaps, and could extend their leads in the time it takes Toshiba to add capacity, Sankar said. The U.S. companies can supply some of their own components, while Toshiba will have to depend on other companies to be able to keep up with its demand.

Evercore ISI analyst Amit Daryanani pointed to this issue as well, writing in a note to clients that Toshiba must "materially outgrow the market," which he projects is expanding by at least 25%, while ensuring it can secure enough components and qualify its higher-capacity offerings with customers. The company's "actual output" could be constrained by its component suppliers, he said.

Daryanani also noted that Toshiba's plan to invest $380 million to expand its HDD manufacturing efforts in the Philippines would still fall short of a meaningful amount of exabytes that would improve its share of the overall market.

"While we concede the headline news isn't positive and the capacity addition [dampens] the disciplined for longer narrative, we see a huge delta" between the announcement of capacity additions and Toshiba's ability to do so significantly, Daryanani said.

He added that he sees Toshiba facing a harder challenge than Western Digital and Seagate given that it depends on other suppliers for HDD components.

-Britney Nguyen

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10-05-26 1725ET