WDC is one of my investments. This year until quite recently I added 140 more shares, mostly between 28 and 35. Biggest part in the low range. I have not added much more because of some of the reasons I talk here below. WDC is an old (and very generous) friend, I had a couple of times before bought and sold it. This is what I just replied to one of my network investor/friends:
Don’t take too seriously my comments because even if all consumers end up using SSDs, storage will keep growing and have to be stored in the cloud. That is in enterprise data centers, in HDDs, or in external storage in private clouds which is a fancy word for an external hard disk basically, or a disk just used to store your media. Good thing is that only two companies, in practical terms, sell HDDs, so WDC is well positioned for that.
Note also that tape is still 50% of all the enterprise storage, and as HDDs get cheaper they replace magnetic tape as the cheapest total cost of ownership to store data in enterprise.
In any case there is a disruption on consumer PC/notebooks, specially due to the fact that HDDs are less and less present in notebooks. They are replaced by SSDs. Add to that the fact that tablets are cannibalizing notebooks, not completely, but at least to a material extent. And tablets don’t even have an HDD. That’s not the end of the HDD because even then most storage will not be destroyed, it simply shifts elsewhere and ends up in a hard drive anyways.
Most people use tablets and smartphones and generate lots of content, videos, pictures… Some is erased but a lot is stored on Facebook, YouTube, or on a drive somewhere on the internet or their house. So those new computing gadgets are helping to generate content too, quite a lot it could be argued.
But the point is that a big transition is coming and maybe WDC has troubles to sell well HDDs to enterprises or to private clouds (for common users in their house). On the other hand if WDC seizes the opportunity they could even end up better than in the past. That’s why they are so focused now on selling private home solutions around storage. Historically WDC has always ended up better after every market transition. So based on history, WDC is excellently positioned. Actually based on cash flows and balance sheet it is very well positioned too. And finally based on its stock price the margin of safety seems quite good.
I do not think they will have troubles in this inflection point we are going through. That’s why I bet on them. But I do recognize that a disruption is happening just now. Where PCs and specially notebooks are being used less and even then the few that are used use less HDDs because they are being replaced by SSDs. So I think that soon all the sales they make to notebooks and PCs with hard drives could disappear or be severely reduced. That’s not necessarily a problem, because by then they will be selling more branded external stuff and more to enterprise. But that process is difficult to quantify and maybe what they lose there due to the reduced hdd PC/notebook sales is more than what they win at the end.
Anyways those are some of the negative things only, which is good to have them in mind. The good thing is that the stocks seems already priced for that. So anything that goes a bit better or less worse than expected will help the stock.
Ahh another thing I have my doubts about is the new CEO. I liked more John Coyne. He seemed more rational. Then again the new one seems Ok, I might be wrong and maybe he is even better. Maybe he takes a bit more risk which might be good.
One thing I never liked much about WDC is that they could have expanded into storage and the cloud more aggressively but lost a lot of market to companies such as EMC. EMC added value around storage solutions, beyond hardware, and got a profitable segment of the market. WDC just stuck with hardware, and even there, their penetration into SSD has been slow in my oppinion.
Now they are changing and trying to catch up. I had never seen them talking so much about SSDs and storage solutions as in their last analyst meeting. I sense that they are worried about it. Actually they said that, even though they do not talk about it, they are investing a lot in SSDs and solutions around storage. Which is good probably, but my point is they could have done it before, more proactively, instead of reactively. Note also that in their last conference call the new CEO used the word cannibalization in the context of SSDs and HDDs (or tablets and notebooks, which is the same), that’s the first time they recognize that publicly.
I might sound pessimist but I’m not, I’m just critical with the things I own maybe more critical than the bulls :).
Anyways all that we have talked about, the WDC cheapness, is also true and I do think that the company is well run. It’s top in its industry and we will end up doing quite well. I just give you some reasons of why I do not invest a lot more than what I currently have. Then again, at even lower prices, after yet another reassessment, I could probably end up adding much more.
PD: I use a cheap and basic photo camera to film stuff. It does not, as the huge majority, have an HDD. But it does generate big files which I copy to my PC or external disk. I only upload some to YouTube because upload speeds are still to slow, once they get faster a bigger explosion of data will follow. I’m sure those files are stored in a HDD disk somewhere, making the cloud and WDC grow. For example this is a Capoeira video from my son, the little blond one, practicing with the famous “Maeste Besouro”: