Western Digital’s Consumer Electronics And External Storage Division In Focus

In the last two quarters, Western Digital (NASDAQ:WDC) has witnessed strong growth in its consumer electronics units, with gaming consoles driving most of the growth. Additionally, the company is targeting the end-user market with a series of products including personal cloud and network-attached storage (NAS) for homes and small businesses. Below we take a look at these products and the value they contribute to Western Digital’s valuation.

See our full analysis of Western Digital here

Consumer Electronics Storage Drives Continue To Surge

Western Digital sold almost 17.4 million consumer electronics storage drives in the previous two quarters combined. Comparatively, the company sold less than 13 million drives in the year ago period. The surge in these product sales was mainly driven by the recently launched fast-selling gaming consoles – Microsoft‘s (NASDAQ:MSFT) Xbox One and Sony’s Playstation 4, which use 500 GB 2.5” form-factor storage disks. ^[1] Both Microsoft and Sony refreshed their product lines with these new consoles after almost eight years, due to which the storage company faced strong demand for the storage drives integrated with the consoles. Going forward, the demand for these gaming console storage units could continue to increase with continued strong console sales. With gaming companies targeting marquee releases in the latter half of the year, it could further drive sales of the Xbox or the Playstation4 consoles.

The company witnessed strong demand for its My Cloud personal cloud range of drives in January, which the company expects to continue in the long run (see WDC Launches Personal Cloud). However, the company’s revenues and units sold for the branded products division (which includes external hard drives and storage units sold via the retail channel) were subdued in the previous quarter. The company attributed this to an increasing mix of cheaper 2.5″ drives compared to the 3.5″ drives, as well as increased competition, with Toshiba grabbing some market share. Unsurprisingly, Western Digital’s major competitor Seagate (NASDAQ:STX) also lost share to Toshiba during the previous quarter. ^[2] However, the company expects the adoption of My Cloud to increase as the concept of personal cloud gains popularity among customers.

Additionally, Western Digital launched the My Book Duo drive to address the growing demand in the consumer network-attached storage (NAS) market in June. Consumer NAS market typically refers to consolidated storage with capacities ranging from 4 terabytes (TB) to 8 TB (1 terabyte = 1,000 gigabytes). This is ideal storage capacity for a family or a very small business (with less than 5 systems accessing data). The drive offers multiple connectivity options across the network, including USB, Thunderbolt (for Macs) and eSATA in addition to WD’s SmartWare Pro software suite and Dropbox integration. The pricing for the storage bay is as low as $280 for a 4TB unit going up to $450 for 8TB of storage. This translates to about 5-6 cents per usable GB, which is on the lower end of NAS storage prices. ^[3]

Western Digital Joins PCIe Flash Bandwagon

The company announced the launch of PCIe connected hard drives, nine months after acquiring PCIe flash specialist Virident for $685 million. This announcement was made shortly after Seagate  entered into an agreement with Avago Technology (NASDAQ:AVGO) to purchase Avago-owned LSI’s flash business for $450 million. SanDisk also acquired PCIe flash maker Fusion-io for $1.1 billion.

The main advantage of PCIe connectivity for a hard drive is the speed of connectivity and reduction in lag time. ^[4] The company has a SATA Express card on offer, to which solid state drives, solid state hybrid drives or conventional hard drives can be connected and then further connected via the PCIe interface. Laptop and desktop manufacturers believe this connectivity could be the future of computer-based storage units, and could improve storage speeds of “compute units” since it bypasses the need for a SATA controller. ^{[5] [6]}

Seagate launched the Kinetic Storage platform in an attempt to replace SATA/SAS connectivity with ethernet connectivity. If the PCIe connected hard drives become popular, they could cut into the market that Seagate’s storage drives could cater to. According to our estimates, Western Digital’s Consumer Electronics and branded products division constitutes about 25% of our $94 price estimate for WDC’s stock. We expect a 5% year-on-year increase in unit shipments in this division in 2014. However, if the company outperforms estimates and sells up to 65 million units this calendar year (up from our estimate of 59 million units), there could be 5-6% upside to our price estimate.

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1. PS4 Selling Faster Than Xbox One, Forbes, January 2014 [↩]
2. Seagate Q3 FY 2014 Earnings Call Transcript, Seeking Alpha, April 2014 [↩]
3. Western Digital Launches My Book Due-2 Bay USB 3.0 DAS, Anand Tech, June 2014 [↩]
4. PCIe Hard Drives? You Read That Right, Says WD, The Register, June 2014 [↩]
5. WD To Demonstrate First PCI Express Hard Drives at Computex 2014, Western Digital Press Release, June 2014 [↩]
6. PCIe SSD Flash Storage Roundup: The Few Become Fewer, Computer Weekly, June 2014 [↩]