Western Digital – The Next Nvidia

As the cloud & big data continues to grow, as well as social media & 4k/8k video, data storage is becoming more important than ever.

Large social media sites take in a tremendous amount of data each day. This storage must not only be stored, but stored with redundancy as well as backups. Major sites such as Facebook and YouTube keep content that is over a decade old. Over time, the drives holding this content will fail and need to be replaced, leading to growing recurring demand as the size of the platform grows.

The need for storage has been growing for decades, but innovation in storage density and intense competition has limited profitability in the market in the past. That being said, there is reason to believe that the growth in storage density may stop keeping up with the growth in storage needs.

There is also reason to believe that transient growth in storage demand may drive higher Q2 earnings. A new digital currency, Chia, has gobbled up about 6 Exabytes worth of storage in the past 3 weeks, now growing at a rate of about 0.4 EiB per day(and rising). https://www.chiaexplorer.com/charts/netspace

For reference, about 288 Exabytes worth of hard drives were shipped in Q1 2021 https://www.tomshardware.com/news/hdd-shipments-in-q1-2021

Chia network size can be considered a lagging indicator for unexpected drive shipments. Generally, it can take a few weeks between when a drive is purchased and when it's actually accounted for on the network, as it takes time for it to be shipped, set up, and plotted. Chia wasn't even listed on exchanges until a couple weeks ago, so most of the growth seen is prior to Chia even having a price. At current prices, mining is incredibly profitable, with a $500 14 TB drive estimated to produce about $26 per day, and using very little power. So even if the network grows 10x to 60 Exabytes, it's still producing $3/day at current prices. So expect the surge in demand to continue.

I have seen many anecdotes of drive shortages over the past couple weeks. Reviewing sites like Amazon, I have also seen high capacity drives go out of stock or require lead times of a few weeks.

This may be a bit reminiscent of GPU shortages among Nvidia and AMD as miners seek to buy up anything they can.

If we project continued growth at 0.4 Exabytes a day in unexpected demand from proof of storage over the next 40 days, plus the 6 Exabytes added since April 20(leaving out first 3 weeks in quarter as they were likely logged last quarter), that's about 22 Exabytes to be added in Q2 that are not part of normal usage, or about an extra ~8% of Q1 demand.

What's perhaps most interesting is the impact this could have on margins. Unlike the GPUs used to mine which are consumer devices, the devices used for mining Chia includes enterprise grade hardware. Prices in the drive market are more flexible at the manufacturer level, and currently have much lower margins. If proof of storage currencies cause a drive shortage, it could have a significant impact on margins. Western digital sells about 40% of its drives through distributors, Seagate about 30%. Sales through these channels generally are very responsive to demand trends in terms of prices.

Seagate is also in a position to profit from this, but I'm a bit more worried about them as hard drive shipments have been on a long term decline and they aren't diversified into SSDs/flash like Western Digital is.

My positions: ~$21k Western Digital, ~$6k Seagate

submitted by /u/skilliard7
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