If anything has proven disruptive to the old-school information technology (IT) hardware stocks, it has been the introduction of the cloud model. In fact, a new research report from Deutsche Bank says it has provoked the most disruptive challenges since the introduction of the personal computer in 1981. While the short term may be tough, the analysts feel that in the longer term the top server vendors and hard-disk-drive companies will see the benefits.
In the research report, the Deutsche Bank team points out that cloud growth has become a double negative for hardware sales, as traditional enterprises are buying less hardware products and public cloud providers are becoming more efficient. Longer term though, they feel the stable and reliable revenue streams offered by the cloud will be a winning hand. They see Hewlett-Packard Co. (NYSE: HPQ), Seagate Technology PLC (NASDAQ: STX) and Western Digital Corp. (NASDAQ: WDC) as the big winners.
HP trades at a very low 8.7 times 2015 estimated earnings, and the stock has been hit and is down sharply from the highs printed in early January. Some Wall Street analysts feel that weak PC demand could negatively impact revenue and free cash flow at the company. The recent decline in the stock may represent investors already discounting a weak first quarter from the Silicon Valley icon.
The server business is where the Deutsche Bank team is bullish, and by adding in the firm’s very solid printer business, investors may be well advised to look at this stock at current lower trading levels.
HP investors are paid a 2.05% dividend. Deutsche Bank has a very solid $45 price target for the stock. The Thomson/First Call consensus target is $40.22, and shares closed Tuesday at $31.16.
Seagate Technology is still down sharply from the highs posted late last year, and some insiders have sold stock in the first quarter. The company and other hard disk drive makers took a hit during earnings season and are just now starting to bounce back. Seagate’s sizable stock repurchase program may put some support under the stock. With 40% of the hard disk drive market (HDD), the company may have issues in the first quarter as soft PC demand translates to lower HDD units being shipped.
While the PC business is the current headwind, again the HDD growth is expected to accelerate over the next two years, and growth in the cloud has been a positive for the leaders.
Investors are paid a very solid 4.15% dividend. The Deutsche Bank price target is a big $72, and the consensus estimate is at $63.50. The stock close Tuesday at $52.03 a share.
This is another leader in the total addressable HDD market at a very impressive 43%, and like Seagate should experience lower shipments if PC trends stay the same through the balance of the quarter. Western Digital attributed much of the gain in revenue growth in recent quarters to the consumer electronics/gaming unit, which saw the biggest upside in the fiscal fourth quarter, shipping 10.9 million units, up 67% year over year. This could help temper the PC decline.
The Deutsche Bank team acknowledges that while some believe that cloud data centers are being built using solid-state drives (SSD) and NAND flash memory, the vast majority of storage in the public cloud is stored on traditional HDDs, a positive for both of the top companies in the space.
Western Digital investors are paid a 2.2% dividend. The Deutsche Bank price target is $128, and the consensus target is lower at $119. The stock closed on Tuesday at $91.01 a share.
Given the downturn in some of the stocks in the report, one would think that some on Wall Street are anticipating worse potential headwinds. That said, it appears that the market has priced in much of the bad news, and all these are very cheap to an overall expensive market.