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I think this article makes a few good points. He addresses the move from pc storage to the cloud, makes several good counterpoints to concerns over margin pressure, and I put together some numbers showing the pace of share buybacks and the STX CEO says it is going to continue.

What he obviously doesn't realize is that storage has been moving to the cloud at a faster pace than it has been moving away from PCs. The reason is not widely known - storage on most PCs doesn't get backed up. In stark contrast, Cloud storage providers have to ensure disaster recovery, failover, around-the-world availability and performance. This requires them to replicate their storage at least three times.

This dynamic is just starting to positively impact the market because 1) PC demand has been falling fast and 2) Cloud storage providers buy storage as they need it, whereas consumers buy a lot of storage capacity up front. With the shift from consumer purchasing to Cloud purchasing, the market experienced the equivalent of an inventory digestion period…which is now coming to a close, as exemplified by STX's stellar earnings report.

In other words, HDD-based storage will experience robust demand for several years to come (yes, flash will grow rapidly as well, but could be 10 years away from being big enough to make a meaningful impact on HDD sales).

Finally, Chanos expressed his concern about margin pressure in the HDD market. That was a valid concern until STX and WDC acquired the next two largest vendors (Samsung (SSNLF.PK) and Hitachi (HICTF.PK)), who also happened to be the most price-aggressive vendors in the marketplace. Those acquisitions effectively turned the HDD market into a benevolent oligopoly, which may experience anti-competitive investigations before they bow to pricing pressure.

Augmenting our argument is the fact that Cloud HDDs carry higher margins than PC HDDs. Also, the industry will run out of manufacturing capacity by year-end. Most means of adding capacity are not particularly cost effective (especially upgrading to new technologies like HAMR), so we can expect supply to tighten and pricing to remain as stable as it has been in some time.


According to Morningstar STX share count in 2010 was about 514 million. Presently, according to Yahoo shares outstanding are 358 million. That is an incredible pace for buying back shares.

This explains why STX's CEO reiterated his commitment to the company's massive buyback program last week.

http://seekingalpha.com/article/1427991-seagate-week-in-revi...
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