Seagate’s Breakout HDD A Game Changer Against Western Digital (NASDAQ:STX)

Seagate (NASDAQ:STX) and Western Digital (WDC), along with Japan’s Toshiba are the only surviving companies making hard disk drive (HDD) storage systems. By way of background, since 1956, over 218 companies have entered the HDD market, but most have disappeared due to bankruptcies or mergers and acquisitions.

In this article, I show that HDD metrics among the three companies are remarkably similar, despite different strategies for next-generation storage.

Now, Seagate has moved the goal post as it unveiled its Mozaic 3+ hard drive platform in January, incorporating Heat-Assisted Magnetic Recording (HAMR) technology to achieve area densities exceeding 3 TB per platter, with future ambitions of reaching 4 TB+ and 5 TB+ per platter.

The platform, which powers Seagate’s Exos product line, offers capacities of 30TB and beyond, allowing for a doubling of capacity within the same physical space, transitioning from a 16TB conventional PMR drive to an Exos 30TB Mozaic 3+ drive. The Mozaic 3+ platform maintains similar material components to PMR drives but significantly boosts capacity, helping data centers cut storage acquisition and operational expenses. It also supports sustainability efforts by reducing embodied carbon per terabyte by 55% compared to traditional 16-TB PMR drives.

With HAMR, a small laser in the hard drive momentarily heats the targeted writing area, causing the disk’s material to temporarily lose much of its coercivity. This allows the magnetic head to write data in a significantly smaller area than normally feasible.

The key to the successful technology spurt was a partnership with Sony (SONY), whose breakthrough in laser diode technology achieves unprecedented precision, targeting areas as small as one millionth of a millimeter. This allows for a significant increase in data storage capacity, with lasers operating at 400 degrees or higher, enabling the writing of more information on the same disk area and potentially doubling the storage capacity of HDDs.

This article compares metrics between Q1 2019 and Q4 2023 for these three companies. In future articles, I will update these metrics to evaluate the performance enhancement brought about by Seagate’s collaboration with Sony.

HDD Metrics

HDD Data Shipped

In Chart 1, I show HDD Unit Shipments for WDC, STX, and Japan’s Toshiba. During Covid lockdowns, demand increased because of the need for increased data centers using HDDs, because of increased purchases of PCs, and the use of videoconferencing and on-line shopping. Following lockdowns, HDDs slowed from a drop in enterprise cloud storage business demand from inventory corrections.

Of note in Chart 1 is that revenues from all three companies dropped as a similar rate during the period, based on their trendlines (dotted lines).

Chart 1

Table 1 shows QoQ change in HDD data by the three companies. It shows strong growth in WDC in CY Q4 while Toshiba reported a jump in Q3.

In its recent Q2 2024 earnings call, WDC CEO David Goeckeler reported on the company’s UltraSMR technology while STX is promoting its HAMR.

“In both the first and second quarters, we shipped approximately 1 million UltraSMR drives per quarter. We forecast UltraSMR hard drive shipments to increase significantly in the fiscal third quarter and SMR drive shipments to continue to outgrow that of CMR drives going forward. Importantly, the adoption of UltraSMR is broadening to our major customers worldwide including a third cloud titan in the U.S. this year, as well as hyperscale and smart video customers in China.”

HDD Revenues

Chart 2 shows HDD Revenues for WDC, STX, and Toshiba. Here we see that revenues follow the same negative trend for all three companies during this timeframe.

The recent sequential revenue growth was fueled by rising demand and better pricing for nearline products. Additionally, I’m optimistic regarding the demand in China, where revenue has doubled both sequentially and on a year-over-year basis.

Chart 2

Table 2 also shows a stronger ramp in Revenue for Toshiba compared to its larger competitors.

Nearline Data Center

While the above charts were data for overall HDD shipments, in principle there are three applications of HDDs – (1) Nearline datacenter, (2) Client or PCs, (3) Consumer.

In Chart 3, I plot HDD Nearline Data Center shipments based on Exabytes of data. It shows a similar trend with data in Charts 1 and 2 above. But for the Data Center, all three companies show a positive trendline, and growth by STX is significantly greater than WDC or Toshiba.

Nearline HDDs are mainstays in data center environments and enterprise storage systems, storing large amounts of data that don’t need to be accessed as frequently as data stored on SSDs. As data center growth resumes following overcapacity generated during Covid lockdowns, and as AI (artificial intelligence) enhances the data center and cloud further, HDDs will also see a resurgence.

On a percentage basis in the latest quarter, Data Center capacity in exabytes represented 74%, 69%, and 65% of Total Capacity of WDC, STX, and Toshiba in the recent quarter.

According to The Information Network’s report The Hard Disk Drive (HDD) and Solid State Drive (SSD) Industries: Market Analysis And Processing Trends, more than 90% of exabytes in cloud data centers are stored on HDDs, and the remaining 10% are stored on SSDs.

Chart 3

Table 3 shows that at the data center, growth for the three companies has been strong, increasing 13.32% in the past quarter.

The average capacity per nearline drive is showing a sequential increase, indicating a slight improvement in demand from both U.S. and China cloud customers. It is believed that inventory levels among many Cloud Service Providers (“CSPs”) are approaching normalization, leading to expectations of continued improvement in nearline demand throughout the March quarter and beyond.

Total HDD Shipped

Shown in Chart 4 are Total HDD Shipped. On a percentage basis in the latest quarter, Data Center capacity in exabytes represented 74%, 62%, and 67% of Total Capacity of WDC, STX, and Toshiba.

Chart 4

Table 4 shows that total HDD shipments had a slight uptick of just 1% in Q4 as data centers have increased capex spend on capacity.

Investor Takeaway

In comparing Seagate’s Heat-Assisted Magnetic Recording (HAMR)-based nearline Hard Disk Drive (HDD) with Western Digital’s shingled magnetic recording (“SMR”) technology, particularly the ePMR (energy-assisted perpendicular magnetic recording) and UltraSMR-based capacity expansion roadmap, the prevailing belief is that Western Digital’s HDD business should not exhibit a significant difference in valuation compared to Seagate.

Nearline HDDs play a crucial role in data center environments and enterprise storage systems, serving as reliable storage solutions for large volumes of data that don’t require frequent access compared to data stored on Solid-State Drives (“SSDs”). With the expected resumption of data center growth following the overcapacity created during the Covid-19 lockdowns, and the continuous integration of Artificial Intelligence (“AI”) to enhance data center and cloud capabilities, HDDs are anticipated to experience a resurgence in demand. As the volume and complexity of data continue to grow, particularly with the expansion of AI-driven applications, the role of HDDs in efficiently storing and managing large datasets is expected to remain significant.

For 2024, the combination of a reduction in inventory to normal levels and the demand for AI by hyperscalers will push cloud capex to a 20% YoY growth. That would result in a significant recover in the nearline data center HDD market.

HDDs continue to offer approximately five times better cost efficiency per bit compared to equivalent flash solutions, and we anticipate this difference to persist through the end of the decade.

Looking ahead, HDDs are expected to maintain market share, thanks in part to advances that continue to increase capacities while maintaining performance. I forecast that HDDs are well-positioned to dominate data centers for the next 10 years.

Chart 5 shows share price changes for a 1-year period. I added the S&P Technology Select Sector Index (IXT) as a check for performance of STX and WDC, both of which are underperforming IXT.

Chart 5

Seagate is on the verge of revolutionizing the hard disk drive (HDD) market with its Mozaic 3+ HAMR-based platform, which is set to enable HDDs with capacities starting at 30TB. In January, Seagate announced that its HAMR-powered Exos hard drives, boasting capacities of 30TB and beyond, would become widely available later in the quarter after completing customer evaluations. These advanced HDDs are designed with hyperscale cloud datacenters and bulk storage in mind, marking a significant leap in storage capacity.

Although these HAMR-based drives represent the pinnacle of storage capacity, immediate sales volume spikes are not anticipated. Seagate has forecasted the shipment of a million units within the first half of 2024, indicating a gradual market introduction.

The Mozaic 3+ technology, underpinned by HAMR (Heat-Assisted Magnetic Recording), is not limited to high-capacity enterprise solutions but will also cater to a range of product categories including Network Attached Storage (NAS) drives and drives tailored for video and imaging application (VIA) markets. Seagate has plans to expand its HAMR technology to its IronWolf and SkyHawk HDD lines, suggesting a broader application of this technology across different storage needs.

As the adoption of HAMR-based drives increases, Seagate anticipates a growing demand for additional components, such as diodes, essential for the HAMR technology. This expansion signifies a significant step forward in HDD technology, promising to meet the ever-growing demand for higher storage capacities in various sectors.