Hard-drive makers are taking a beating on Wall Street following a downgrade of Western Digital ( WDC) and a warning that a price war could damage the sector. In recent trading, shares of Western Digital were off the most, down $1.51, or 6.8%, to $20.86; Seagate ( STX) was down $1.76, or 6.4%, to $25.76, and Maxtor ( MXO), which is in the process of being acquired by Seagate, was losing 62 cents, or 6.2%, to $9.35. Kaufman Brothers analyst Shebly Seyrafi downgraded Western Digital, to sell from hold saying, "our channel suggests that starting in early February, a major price battle began as the various hard drive players, especially Western Digital, started aggressively pursing Maxtor's hard drive business." Seyrafi and other analysts believe that PC makers, and other major customers will be reluctant to rely too heavily on a single source -- the merged Seagate/Maxtor -- and that gives Western Digital and smaller rivals a chance to steal market share. But Seyrafi says prices have slipped 10% to 12% since early February, and he noted that a Western Digital executive said late last month that "price declines are within expectations for the quarter." Kaufman Brothers does not have an investment banking relationship with Seagate or Western Digital. However, increased manufacturing efficiencies by Seagate are acting as a price offset, the analyst said, and he did not change his estimates for the Scotts Valley, Calif., company. Jim Porter, a veteran industry watcher who heads Disk/Trend, a research company, said if there is price cutting, it is likely restricted to desktop drives, since Western Digital is not a major producer of drives for notebooks, a sweeter spot of the market. Moreover, he says, "I'm not aware of widespread price cutting." However, it is likely that there have been sharp cuts in specific instances as the drive makers battle to win the business of particular manufacturers, he said.
A spokesman for Seagate wouldn't comment directly on the price war theory, but said, "We've been to two analyst conferences in the last few days, saying we are very comfortable with guidance for the quarter. Seagate expects to earn a profit of roughly 55 cents a share on sales of $2.25 billion in the third quarter, or March, quarter. A year ago, Seagate earned 45 cents a share on sales of $1.9 billion. Price cutting is a standard tactic in the hard drive business; in the past it has been so severe that numerous manufacturers have been driven out of the market. In the last year or so, the remaining drive makers have tended to be more disciplined about pricing, though period bouts of price slashing still occur, along with normal price deterioration.