Storage Takes the Stage

But the pessimists overlooked two important facts: Hard drives are cheaper than flash and will be for a while, and all those iPod nano users would need to back up their music, video and photos elsewhere. So the flash rage pumped new life into hard drives, rather than sucking it out. And consumers have proven all too impatient to back up their media files onto remote online servers: Broadband speeds may be increasing, but media files are getting fatter at a faster rate.

Most analysts are favoring Seagate as having the brightest prospects in the industry, even though its valuation is below that of Western Digital.

"A transition from desktop computers to notebook computers should drive unit growth in notebook drives, where Seagate has increased its market share to 12% [in the third quarter of 2005] from 5%" in the year-ago quarter, wrote Kaushik Roy of Susquehanna Financial Group, who recently initiated coverage on Seagate with a positive rating (and whose firm has no underwriting relationship with Seagate).

Needham analyst Richard Kugele says Seagate is likely to enjoy a good run through 2006 with its 160-gigabit hard drive -- four times as large as the drives in most notebooks sold today. "After years of significant R&D expense, Seagate's investments are on the verge of offering the company its first multiquarter technological advantage," through the 160-gigabit product, he says. Needham has no underwriting relationship with Seagate.

The $23 billion disk drive industry has its share of long-term problems: It's a cutthroat business that demands huge capex investments; it could, in a few years, face tougher times should flash memory become cheaper and more powerful; and it's just not a very sexy industry.

But the dim view many tech investors take of the sector has grown so dark -- and at a time when things are, for now, looking a bit brighter -- that it's creating a chance to get in on one of the last, overlooked corners of the digital media boom.

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