Storage Makers Ride Digital Wave

SAN FRANCISCO -- Storage-device makers have been preaching about the digital wave that's gaining momentum and fueling the need for their wares.

The most glaring sign that their words are more than just spin came last week when Seagate Technology (STX Quote - Cramer on STX - Stock Picks) surprised investors by dramatically raising its first-quarter profit targets.

The company's stock rose almost 4% last week, largely from this news. Seagate was recently trading up 41 cents, about 1.6%, to $26.23.

The photos, PowerPoint presentations, digital music and movies that are sloshing around the Internet are spurring fresh demand for hard-disk drives. This content gets stored on personal computers, Internet servers and TV set-top boxes, and backed up on storage appliances -- all of which use hard drives.

Seagate and Western Digital (WDC Quote - Cramer on WDC - Stock Picks) are the only two American companies standing after rounds of consolidation. They're also the largest in the world by production and the most likely to generate profits from the rising demand for storage.

After bloody price wars with Asian conglomerates a decade ago, these companies have built moats around their profits by bringing most phases of production in-house. At the same time, they've learned to keep output in line with current demand rather than expected demand.

Inventory levels, as a result, are running at the low end of the four-to-six-week liquidation rate, far below levels witnessed between 2002 and 2004 when suppliers held up to 10 weeks of inventory at times.