The mobile revolution has spawned a popular pastime: death forecasting.
Indeed, the proliferation of tablets is killing existing industries, like the PC market.
What's the next industry to wither and die? Pundits say it's companies that make key PC components.
It makes sense, right?
Take hard disk drive (HDD) manufacturer,
Seagate (STX), for example.
If we omit the outlier (the year of the Great Recession), the company is trading at its lowest price-to-earnings valuation in a decade.
But those counting this company out are making a mistake. Here's why...
The Doom-and-Gloomers Are Missing the Point
Research firm Gartner expects shipments for all connected devices (PCs, tablets and mobile phones) to rise by 9% this year to 2.4 billion units.
However, the number mainly comes from the runaway growth in tablet and mobile phone sales. It doesn't reveal the erosion in PC shipments, which are expected to drop by 7.6% in 2013.
And that's what investors remain fixated on - the shift from PCs to tablets and smartphones.
They know the trend directly impacts Seagate and its main rival,
Western Digital (WDC), because they control 90% of the market for HDDs, which are found in PCs.
But few investors are considering a statistical anomaly.
While PC shipments are expected to drop by 7.6%, iSuppli only expects HDD shipments to fall by 2.4%.
How can that be?
After all, if fewer people are buying PCs - and PCs require HDDs - shipments of
both PCs and HDDs should be falling together, right?
Not exactly...
Data, Data... and Yet More Data
PCs aren't the only market for HDDs.
HDDs are also key components in data storage servers.
So while PC demand might be declining, demand for enterprise data storage solutions is anything but doomed.
But don't just take my word for it.
As Forrester Research's Richard Fichera told
Barron's, building server farms is "the élan vital [vital impulse] of modern society."
Translation: The need for data storage means HDDs are
not on a crash course with obsolescence.
On the contrary. As consumers create and access more data, all that information needs to be stored somewhere.
Or, as the analysts at Trefis put it, "The high growth rate of digital content is driving the need for high capacity storage to aggregate, host, distribute, manage, back up and use digital content."
Seagate Catches Some "Zzzs"
To put the massive growth of digital content into perspective - and, in turn, the need for enterprise-level data storage - consider this:
Cisco (CSCO) expects global cloud traffic to surge by 45%
per year over the next three years to reach 4.3 zettabytes.
What the heck is a zettabyte?
It's equal to one quadrillion gigabytes. And if you're having trouble getting your head around the number, this should help put it into perspective...
As of 2009, the entire World Wide Web contained almost half a zettabyte of data. Do the math... and we're talking about
more than eight times the entire World Wide Web in data.
So while Seagate will suffer as more consumers ditch PCs in favor of mobile devices, the company ultimately stands to make it all up (and then some) as demand for enterprise storage balloons.
And it's not as if Seagate is meekly admitting defeat in the mobile market. Far from it. The company is aggressively retooling its product line to offer solid state drives (SSD) - the primary storage devices used in tablets.
Given Seagate's enormous distribution channel, strong brand recognition and impressive free cash flow, there's little chance it will fail in penetrating the market.
Seagate's Cash is Heading to Shareholders' Pockets
Simply put, fears of Seagate's imminent decline at the hands of the mobile revolution are exaggerated.
In turn, its rock-bottom valuation - shares trade for less than five times earnings - is also unjustified.
But a cheap share price and steady demand aren't the only reasons why I'm bullish.
Seagate's management is committed to returning what CEO Steve Luczo calls the "exceptional cash generation" to shareholders via dividends and stock buybacks.
After reinstating its dividend in April 2012, Seagate has already hiked it twice. The stock now sports an attractive 4.2% yield.
And Seagate is anything but a "
Buyback Trap." It's aggressively reducing the number of shares outstanding (down 14% in the past year), thereby increasing earnings per share. And since stock prices ultimately follow earnings, additional buyback activity bodes well for investors.
Bottom line: If you don't like the volatility that comes with the disruptive technology stocks I often feature here, consider Seagate.
The company is increasingly levered to the world's fastest growth trend, ever. The current valuation limits the downside risk, while the healthy dividend means you'll get paid until the rest of the market figures out what's going on.
Ahead of the tape,
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Louis Basenese
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