Outlook for Computer Storage Devices Industry Remains Cloudy

The Zacks Computer-Storage Devices industry comprises companies that design, develop, manufacture and market a broad range of hard disk drives (HDDs) used in desktop PCs, servers, network-attached storage devices, video game consoles, digital video recorders and a host of other consumer electronic devices.

A few companies also provide software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. There are others that offer high-performance memory subsystems and enterprise storage and data management software as well as hardware products and services.

Widespread use of streaming media, cloud storage solutions, cloud-based apps, data virtualization and other data-intensive activities have set the industry on a growth trajectory.

Here are the three major themes in the industry:

  • The industry is benefiting from increasing use of high-storage mobile devices. Robust growth in the amount of data, complexity of data formats and the need to scale resources at regular intervals represent significant growth opportunity for the industry players. Extensive implementation of CRM solutions, increased Internet usage, and rapidly growing media and regulatory compliance have resulted in data explosion for enterprises. This in turn has bolstered the deployment of high-capacity mass storage products, which is a positive for the industry participants. Notably, effective storage is essential for proper harnessing of data.
  • Reviving PC market scenario should boost the industry’s top line. That’s because, PCs remain the greatest users of HDDs and companies in this industry still derive bulk of their revenues from these devices.
  • However, the Computer – Storage Devices industry is facing challenges due to NAND flash pricing, which is currently on the decline due to oversupply and weaker-than-expected growth in end-market demand. Therefore, a drop in prices is impacting revenues and margins of players in the space, and somewhat offset benefits from improved demand and prices for DRAM products.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Computer – Storage Devices industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #171, which places it at the bottom 33% of 256 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year increased by 2.3%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Computer – Storage Devices industry has lagged the broader sector as well as the Zacks S&P 500 composite over the past year.

The industry has lost 12.4% over this period compared with the S&P 500’s rise of 5.8% and the broader sector’s decline of 0.7%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing software companies, we see that the industry is currently trading at 8.05X compared with the S&P 500’s 17.8X. It is also below the sector’s forward-12-month P/E of 18.32X.

Over the past five years, the industry has traded as high as 18.68X, as low as 8.03X and at the median of 12.67X, as the chart below shows.

Bottom Line

Robust market adoption of cloud computing, big data, IoT, auto, connected devices, VR and AI will continue to aid revenue growth for the industry participants. However, operational risks, rising construction costs, entitlement delays and failure to fulfill government requirements are likely to remain concerns.

Here, we present one stock sporting a Zacks Rank #2 (Buy) that is well positioned to gain amid the prevailing challenges. There are also a couple of stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NetApp, Inc. (NTAP Free Report) : This enterprise storage provider has gained 31.4% over the past year. The Zacks Consensus Estimate for this Zacks Rank #2 company’s current-fiscal EPS has increased 2.3% over the past 60 days.

Pure Storage, Inc. (PSTG Free Report) : This Mountain View, CA-based software-defined all-flash solutions provider has gained 8.9% in the past year. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-year EPS estimate has increased 50% over the past 60 days.

Teradata Corp. (TDC Free Report) : This Dayton, OH-based Enterprise Data Warehousing solutions provider has gained 4.4% over the past year. The Zacks Consensus Estimate for this Zacks Rank #3 company’s current-fiscal EPS has appreciated 2.5% over the past 60 days.

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