Hard-Drive Makers Have Growth in Store

To find the best tech investment, think hard ... hard disk drives, I mean. That's right, in the middle of a so-called financial and economic meltdown, I believe it's time to look at the hard-disk-drive business. Some of my colleagues say I'm downright nuts for investing in this space. But let me share my thinking with you.

Despite excellent fundamentals, the stocks are cheap and compelling. Seagate(STX Quote) and Western Digital(WDC Quote), the two leading global hard-drive companies, trade for about 7 times 2008 calendar earnings, with 15% and 40% revenue growth respectively. These two companies have some of the strongest absolute growth and positive earnings estimate revisions in the entire technology sector.

Yet many investors shun the space. As with many cyclical growth industries, hard-disk-drive makers are being restrained by fears of the economic slowdown. And the drive industry is known for a fair amount of pricing and profitability cyclicality on its own. Historically, a slowdown in global tech spending has been bad for hard-drive vendors and for stock prices. With current economic conditions being as they are, one would expect hard-drive makers to grind to a halt.

But they're not. Conditions in the hard-drive industry are excellent and improving. Voracious demand for storage has demand in the hard-drive business simply exploding. Global businesses and consumers purchased 500 million units in 2007, and volume should approach 600 million in 2008. Computer growth is still healthy, with emerging-market demand driving global unit growth. Once you get Internet access on your cell phone, you want it on a laptop as well. A billion new emerging-market technology consumers want their broadband, and with it the capacity to store their own photos, videos and music.

New markets such as autos, security cameras, televisions, set-top boxes, gaming consoles and external backup drives are accelerating historical growth rates. The most significant addition to the hard-drive growth story is the external backup application. For the first time in the history of the personal computer, the value of the digital content on a computer far exceeds the actual cost of the hardware. It's not just spreadsheets and documents but also music, video and photographs. And that makes a $100 backup drive a must. It's simply so cheap and easy to back up one's digital content that there's no reason not to.