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No. of Recommendations: 3
An analysis report:

"Over the last few days, we have been getting an increasing number of
questions regarding Apple shifting its ipod mini storage medium from
1" HDDs to flash.
First, we would note that this concern has been out there since the
Spring.
Second, while we believe it is possible that Apple will offer, in the
relatively near future, a lower-end iPod mini, we would remain
skeptical of wholesale replacement -- particularly on higher-end
capacity points -- due purely to economics. For example, a 4GB iPod
mini sells today for $199. A 4GB hard drive has a bill of material
cost of approximately $70. 4GB of capacity from flash would cost at
least $160 at today's low-end spot rates. In addition, Seagate is
ramping production on a 8 GB 1" product that will likely sell for
nearly the same ASP. Finally, there is some debate on whether or not
there is sufficient capacity to meet a complete iPod mini transition
to flash. Therefore, we believe it is likely that Apple may introduce
a 2GB mini and potentially a 4 GB ipod mini using flash that offers
extended battery life (and better durability), but would expect them
to also offer a 1" HDD based iPod mini at 8GB and potentially 10 GB
capacity points as well. Separately, we would note that the maker of
the Rio MP3 player is getting out of the MP3 business.
Third, while Apple's potential move to flash would obviously be a
modest disappointment for the drive industry, we do not believe it has
a meaningful impact on Seagate. We estimate they shipped
approximately 6 million 1" drives over the last 4 quarters. Assuming a
$70 price point, that would imply approximately $420 million in
revenue. Further, we would point out that over 20% of the 1" units
shipped last quarter by Seagate went for non-MP3 applications.
Therefore, while Apple represents approximately 70%-80% of the MP3
market, they probably only purchased approximately 1.3-1.5 million
units from Seagate last quarter or approximately $100 million (4%-5%
of revenue) and less as a percent of profits.
Additionally, Seagate's factories are structured in such a way that
they can easily flip to other form factors within a day or two....this
is something competitors cannot do as quickly.
With regard to the enterprise market, we have already built into our
model, as we believe has the rest of the street, expectations that
Hitachi would be more competitive in 2H05...so this would not
represent a change in our numbers....in fact, if Hitachi once again
stumbles, it would represent upside for STX. The enterprise market is
once again seeing normal price declines.
Desktop spot market prices remain firm suggesting solid sell-through
for back to school.
Finally, STX still has several other important and potentially
sizeable growth vectors ahead:
1 - the notebook market, which experienced 33% y/y growth in the last
quarter and is expected to grow north of 20%y/y for the next several
year -- STX has a low double digit market share in this segment -- but
the new perpendicular notebook drive should allow them to vault to a
leadership position -- this market is much more important and sizeable
than the MP3 market.
2. The PVR market -- Seagate has been rapidly gaining share in this
rapidly emerging market.....these are higher ASP and higher margin
contribution dollar drives -- should be a significant driver of STX
growth over the next several years.
3. the auto market - several 2006 model year cars (including a new
Acura model) will be coming out with hard drives built in....total
shipments into the automobile market in 2005 were probably around 1
million units -- a fraction of the total car market potential.
Net, net we continue to like Seagate and would use the weakness as a
buying opportunity. Apple and enterprise concerns have generally been
built into the stock and account for much of the decline in the stock
price recently. Today's downside likely reflects more of a lack of
buyers on weakness than meaningful fundamental issues. Further, free
cash flow yield adds significant downside support."


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