Seagate Left Open in Rush to Flash

Editor's Note: This is a bonus column from Will Gabrielski, whose commentary usually appears only on RealMoney. It was originally published on RealMoney at 1:10 p.m. EDT Thursday. We're offering it today to TheStreet.com readers. To read Gabrielski's commentary regularly, please click here for information about a free trial to RealMoney.

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There are a lot of battles brewing in tech, and most of them have been outlined on these pages.

You have Microsoft(MSFT Quote) vs. Google(GOOG Quote) (and now Sun Microsystems(SUNW Quote)) in software and search; you have Sirius(SIRI Quote) vs. XM Satellite(XMSR Quote) in satellite radio, then you have Sirius and XM Satellite vs. the broadcast radio world, and you have competing high-definition DVD standards, Blu-Ray and HD-DVD.

All these battles will be waged over the coming months and years, and have no clear winner. However, the Street appears to have chosen, prematurely, a winner in another battle -- flash memory vs. hard drives -- and that has created an opportunity to take the other side of the trade.

Shares of flash makers such as SanDisk(SNDK Quote) are clearly outperforming those of hard-drive makers such as Seagate Technology(STX Quote). In fact, SanDisk has doubled since July, while Seagate is down 18% during the same period. This underperformance of hard-drive makers has created a compelling entry point in Seagate, which was recently trading at $15.88.

Seagate is my top pick in the hard-drive space because it is the cheapest in the sector, and it often beats its competitors to market with new products.

With the stock down 8% year to date and 25% off of its 52-week high, Seagate is trading at just 8 times forward earnings estimates vs. 10.5 times for competitor Western Digital(WDC Quote) and 30 times for SanDisk. This implies that investors don't expect Seagate to fall short of the 20%-plus EPS growth analysts are looking for over the next few years. It's trading at just a fraction of its growth rate, and that means value investors may begin to pick away.

It is easy to hand the trophy in this battle to flash memory after Apple's(AAPL Quote) flash-based iPod nano created an immediate flash memory supply shortage. But hard drives have several critical advantages that could enable their makers to stretch the recent product cycle beyond 2005.

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