The Zacks

Computer-Storage Devices

industry benefits from encouraging trends in PC shipments and solid momentum in cloud computing, Internet of Things (IoT), auto, connected devices, virtual reality and Artificial Intelligence (AI). These factors propel the demand for robust data storage solutions, bolstering the requirement for computer storage products. This favors the prospects of prominent industry players like

NetApp


NTAP

,

Pure Storage


PSTG

and

Super Micro Computer


SMCI

. Democratization of higher internal memory smartphones, faster Internet speed and 5G is likely to act as a tailwind for the industry participants. Rapid deployment of 5G networking is driving the proliferation of IoT, Advanced Driver Assistance Systems (ADAS) and Augmented Reality/Virtual Reality (AR/VR) devices. However, negative impacts stemming from the pandemic-triggered supply chain disruptions and component shortages are a concern in the near term.

Industry Description

The Zacks Computer-Storage Devices industry houses companies that design, develop, manufacture and market various hard disk drives (HDDs) and solid-state drives (SSDs). These drives are utilized in PCs, laptops, mobiles, servers, network-attached storage (NAS) devices, video game consoles, digital video recorders and other consumer electronic devices. A few industry participants, including Pure Storage, provide software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. Many industry players offer high-performance modular memory subsystems, mount and blade server systems, enterprise storage and data management software and hardware products and services. Some industry participants also provide purpose-built servers for storing and accessing data over a shared network or the Internet.

4 Trends Shaping the Computer-Storage Industry’s Future

New Normal Trends & Rapid Implementation of 5G Opening New Business Avenues


: Coronavirus-induced work-from-home and hybrid work models have triggered demand for data-intensive applications like video conferencing and cloud services. Effective storage is essential for harnessing data and is expected to raise demand for high-storage capable SSDs and internal memory in advanced smartphones. Accelerated deployment of 5G and rebound in the smartphone market will likely propel the industry to newer heights. Extensive implementation of cloud computing solutions, increased Internet usage and rapidly-growing media and regulatory compliance, driven by coronavirus-led work-from-home setup, have led to a data explosion for enterprises.

Innovation in Cloud Storage Technologies to Drive Adoption


: Extensive storage options from collocated hardware (such as hard disks and tape drives) to many cloud storage solutions have put the industry on a growth trajectory. The industry players are well poised for growth on the back of a rapid increase in the amount of data, the complexity of data formats and the need to scale resources at regular intervals. The companies rely on Artificial Intelligence for IT Operations (AIOps) and machine learning (ML) to manage and optimize storage solutions. To streamline data storage, companies are relying on virtualization technologies. As more data is amassed from IoT, companies are turning to edge computing architecture to reduce latency and boost flexibility. Kubernetes storage is becoming increasingly popular as it facilitates greater agility and scalability. This has bolstered the deployment of high-capacity mass storage products, which is a positive for industry players

Macro Headwinds May Prove a Drag on IT Spending


: Per a

Gartner report,

worldwide IT spending is expected to increase a mere 0.8% in 2022 compared with 2021 levels and reach $4.4 trillion. Rising inflation is compelling organizations across the world to cut back on IT spend. Consumer spending cuts on the purchase of PCs, tablets and printers are likely to bring down the IT spending growth. Higher technology spending will drive the upside in the long term as enterprises continue to build sound technological infrastructure. For 2023, Gartner projects IT spending to be up 5.1% year over year, which is still less than the 10.2% spurt witnessed in 2021.

Slowing Momentum in PC Shipments Might Hinder Growth Prospects


: Worldwide PC shipments dropped 19.5% to 68 million units in the third quarter of 2022,

according to the data compiled by Gartner

. The latest Gartner report depicts the end of the massive spike in PC demand due to the pandemic-led work-from-home and online learning wave. In the third quarter, sales were affected by a huge inventory pile-up amid easing supply chain bottlenecks and a slump in demand. Further, global macroeconomic weakness, the Ukraine war and inflationary pressure are leading to careful IT spending by business organizations. A slowing PC market does not augur well for the industry participants.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Computer Storage is housed within the broader Zacks C

omputer And Technology

Sector. It carries a Zacks Industry Rank #157, which places it in the bottom 37% of more than 250 Zacks industries.

The group’s Zacks

Industry Rank

, which is the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. The industry’s loss estimates for 2023 now stand at $3.05 against a loss estimate of $2.05 as of Nov 30, 2022.

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

Industry Lags S&P 500 and the Sector

The Zacks Computer-Storage Devices industry lags both the Zacks S&P 500 composite index and the broader sector in the past year.

The industry has lost 36.8% over this period compared with the S&P 500’s decline of 21.2%. The broader sector has declined 35.6% in the same time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month P/E (or Price/Earnings), which is a commonly used multiple for valuing computer storage devices companies, we see that the industry is currently trading at 16.34X compared with the S&P 500’s 17.24X. It is also below the sector’s forward-12-month P/E of 20.10X.

In the past five years, the industry has traded as high as 22.81X and as low as 10.43X, with the median being 14.87X, as the charts below indicate.

Forward 12-Month Price-to-Earnings (P/E) Ratio

Forward 12-Month P/E Ratio

3 Computer-Storage Devices Stocks to Add to Watchlist

NetApp

: NetApp’s performance is benefiting from continued strength in Hybrid Cloud and Public Cloud segments and robust billings growth. The company is well-positioned to gain from data-driven digital and cloud transformations. Cloud storage services benefited from new Spot customer additions.

Also, the rapid adoption of FAS hybrid flash arrays and all-flash arrays bodes well. The company is likely to benefit from declining NAND prices and product launches like BlueXP. Strategic collaborations with VMware and Amazon Web Services bode well in the long term. However, pandemic-induced supply-chain woes and unfavorable foreign currency movement are likely to remain as headwinds, at least in the near term.

NetApp expects fiscal 2023 revenues to grow in the range of 2-4% year over year. Public Cloud ARR is expected to be nearly $700 million.

NetApp carries a Zacks Rank #3 (Hold).

You can see



the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

The Zacks Consensus Estimate for fiscal 2023 earnings for the company has remained unchanged at $5.42 per share in the past 30 days. Its long-term earnings growth rate is pegged at 8.8%.

Price and Consensus: NTAP

Pure Storage:

Pure Storage’s performance is benefiting from continued momentum in product and subscription services’ revenues. Subscription revenues are gaining from the robust adoption of Evergreen subscription services and ongoing support contracts. The company is likely to benefit from the growing demand for its FlashArray and FlashBlade businesses and strong growth prospects in the data-driven market of machine learning (ML) bode well. Frequent product launches and synergies from the acquisition of Portworx are tailwinds. Pure Storage added more than 390 customers in the last reported quarter. The company’s customer base has more than 11,000 customers and represents 58% of Fortune 500 companies.

The company reiterated its outlook for fiscal 2023 revenues. For fiscal 2023, Pure Storage now expects revenues of $2.75 billion, indicating year-over-year growth of 26%.

Pure Storage carries a Zacks Rank #3. The Zacks Consensus Estimate for fiscal 2023 earnings for the company improved 8.5% to $1.28 per share in the past 60 days. Its long-term earnings growth rate is pegged at 21.3%.

Price and Consensus: PSTG

Super Micro Computer:

The San Jose, CA-based company designs, develops, manufactures and sells energy-efficient, application-optimized server solutions based on the x86 architecture. The company’s solutions include a range of rack mount and blade server systems and components. Super Micro also produces server boards, chassis and server systems.

In the last reported quarter, the company’s revenues of $1.85 billion surged 12.8% year over year. For fiscal 2023 (ending June 30, 2023), the company now expects net sales to be in the range of $6.2 -$7 billion.

Shares of Super Micro Computer, which sports a Zacks Rank #3, have gained 84.9% in the past year.

The Zacks Consensus Estimate for fiscal 2023 earnings for the company remained unchanged at $9.58 per share in the past 60 days

.

Price and Consensus: SMCI

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