The Zhitong Finance App learned that according to reports, Toshiba plans to double the hard disk drive (HDD) production capacity for AI data centers by 2027 compared to FY2025, and has set a medium-term target of increasing its market share to 30%. This news caused the “hard drive duos” Seagate Technology (STX.US) and Western Digital (WDC.US) to drop more than 10% last Friday. Goldman Sachs released a research report stating that Toshiba's expansion of production will be difficult to change the profit pattern of hard drives in the short term, but it may suppress its valuation in the medium term; the upstream Japanese parts and materials supply chain is seen as the main beneficiary.
Goldman Sachs judgment: Toshiba's intention to expand production is clear, but the execution history is questionable
Based on recent communication with industry experts, Goldman Sachs believes that Toshiba does intend to expand hard drive production capacity, and this intention has also been confirmed by its partner TDK's plans to expand magnetic head production. However, Goldman Sachs also warned that at the 2022 Investor Day event, Toshiba said it would expand production capacity, increase its market share from 17% at the time to 25% by 2025, and mass-produce 40TB hard drives during the same period — none of these goals have been achieved. Toshiba's current market share is only 11%.
However, considering that the current profitability and growth rate of the hard drive industry far exceeds that of the past, Goldman Sachs believes Toshiba has strong incentives to take advantage of current market conditions and is likely to try to advance these plans.
Impact on Seagate and Western Digital: No panic in the short term, pressure in the medium term
Goldman Sachs pointed out that even if the probability of success of Toshiba's expansion of production is set at a medium level, the bank expects the industry pricing and profit margin patterns of Seagate and Western Digital to remain relatively stable in the short term. Furthermore, Goldman Sachs believes that these two companies (Seagate in particular) are leading the HAMR (Thermally Assisted Magnetic Recording) technology roadmap, which helps them maintain high profit margins.
However, in the medium term, Toshiba's expansion of production may limit the upward margin of the two companies. More importantly, this may suppress their valuation multipliers — currently Seagate and Western Digital's forward price-earnings ratio is 18-20 times, while the memory chip sector is only 4-8 times.
Upstream supply chain welcomes benefits
Goldman Sachs believes that Toshiba's expansion of production is a positive factor for the hard drive parts and materials supply chain.
Unlike hard drive manufacturers, most upstream supply chains (mainly Japanese companies) have not implemented aggressive price increase strategies. Over the past year or two, their main revenue came from product structure improvements brought about by the increase in the share of near-line hard drives, and increased capacity utilization and profit due to increased sales volume.
Therefore, Goldman Sachs does not believe that Toshiba's potential increase in production will raise concerns about increased supplier competition or changes in market share; on the contrary, Goldman Sachs believes that positive factors such as an increase in the share of high-tech products and an increase in sales volume across the industry will drive up profit expectations.
Goldman Sachs also consulted industry research agency TSR. According to TSR, the share of hard drive capacity is determined by both shipment volume and single disk capacity, and Toshiba's share of shipment volume is on the rise. This investment is presumed to address delays in the transition to larger capacity, and may target the MG13 series and subsequent products. On the other hand, it is quite difficult to launch a high-capacity production line in the short term, and the threshold for achieving the technical roadmap, production capacity and capacity share targets is not low.
Hard disk-related component companies include: (1) TDK, which mainly supplies hard disk heads to Toshiba, but has also begun shipping to Seagate/Western Digital, and is also the main supplier of hard drive suspensions; (2) Mibea Sanmei, which has an overwhelming share in the pivot field, supplies 100% of hard drive spindle motors to Seagate; (3) Nidec supplies 100% of hard drive spindle motors to Western Digital/Toshiba; (4) Nitto Electric has an overwhelming share in the field of high-performance circuit materials.
Hard disk-related materials companies include: (1) HOYA, a supplier of glass substrates; (2) Lysenoco, which sells hard drive media to Toshiba/Western Digital/Seagate.
Investment bank ratings and target prices
In terms of individual stocks, Goldman Sachs gave Seagate a “buy” rating with a target price of $960; Western Digital gave it a “neutral” rating, with a target price of $615. In terms of Japanese suppliers, Goldman Sachs gave TDK, HOYA, and Lysenox a “buy” rating, with target prices of 4,900 yen, 36,000 yen, and 2,560 yen, respectively.