Global macroeconomic turbulence is a significant headwind for the Zacks Computer-Storage Devices industry players in the near term, along with volatile supply chain dynamics and inflation. However, industry players are likely to gain from exponential data generation growth owing to solid momentum in cloud computing, Internet of Things (IoT), auto, connected devices, virtual reality and Artificial Intelligence (AI) in the long run. These factors propel the demand for robust data storage solutions, bolstering computer storage product requirements. These factors are favorable for prominent industry players like NetApp NTAP, Pure Storage PSTG and Netlist NLST. The democratization of higher internal memory smartphones, faster Internet speed, and 5G will likely act as a tailwind for industry participants. The rapid deployment of 5G networking, the proliferation of AI, IoT, Advanced Driver Assistance Systems and Augmented Reality/Virtual Reality devices are expected to drive demand for next-gen storage devices.
Industry Description
The Zacks Computer-Storage Devices industry houses companies that design, develop, manufacture and market various hard disk drives (HDDs) and solid-state drives (SSDs). These drives are utilized in PCs, laptops, mobiles, servers, network-attached storage devices, video game consoles, digital video recorders, and other consumer electronic devices. Some industry participants, including Pure Storage, provide software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. Many industry players offer high-performance modular memory subsystems, mount and blade server systems, enterprise storage and data management software, and hardware products and services. Some industry participants also provide purpose-built servers for storing and accessing data over a shared network or the Internet.
4 Trends Shaping the Computer-Storage Industry's Future
Increases in IT Spending Bode Well, but Macro Conditions Remain Concerns: Uncertain global macroeconomic conditions and supply chain dynamics are drawbacks. Uncertainty in the macro backdrop and inflationary pressure could affect spending across small and medium-sized businesses globally. The uncertainty in business visibility could dent the industry’s performance in the near term.
However, optimism surrounding higher IT spending bodes well. Per a report from Gartner, worldwide IT spending is projected to reach $5.74 trillion in 2025, implying an increase of 9.3% from 2024 levels, as tech companies focus on building the supply-side infrastructure for GenAI. The recent report also highlighted that data center systems spending growth is anticipated to be 15.5% in 2025. The upside will be driven by the increasing server sales. Gartner added that IT services spending is projected to grow 9.4% in 2025, while software spending is anticipated to increase 14% to $1.23 trillion. Both these segments will benefit as tech companies increase spending on AI-related projects, including email and authoring, added Gartner.
Innovation in Cloud Storage Technologies to Drive Adoption: Broader storage options from collocated hardware (such as hard disks and tape drives) to many cloud storage solutions have put the industry on a growth trajectory. The industry players are well poised for growth owing to a rapid increase in data, the complexity of data formats, and the need to scale resources at regular intervals. These companies rely on AI for IT Operations (AIOps) and machine learning to manage and optimize storage solutions. To streamline data storage, companies are relying on virtualization technologies. As more data is added from IoT, companies are turning to edge computing architecture to reduce latency and boost flexibility. Kubernetes storage is becoming increasingly popular as it facilitates greater agility and scalability. This has bolstered the deployment of high-capacity mass storage products, a positive for industry players.
Rapid Implementation of 5G Opening New Business Avenues: The accelerated deployment of 5G and rebound in the smartphone market will likely propel the industry to newer heights. Extensive implementation of cloud computing solutions, increased Internet usage, and rapidly growing media and regulatory compliance have led to a data explosion for enterprises. The implementation of hybrid work models triggered the demand for data-intensive applications like video conferencing and cloud services. Adequate storage is essential for harnessing data and is expected to raise demand for high-storage capable SSDs and internal memory in advanced smartphones.
Uncertainty Around PC Shipments: Worldwide PC shipments were up 1.8% year over year in the fourth quarter of 2024, per an IDC report. The research firm noted that the demand has been witnessing a slower return to growth, government subsidies in China led to a better-than-expected performance in the fourth quarter. However, IDC highlighted that the new administration change in the United States, coupled with the threat of new and increased tariffs, has raised concerns across the industry. Also, global macroeconomic concerns are weighing down on optimism around AI PCs, added IDC.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Computer Storage is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #235, which places it in the bottom 6% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a downbeat earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential.
Before we present a few stocks that you may want to consider for your portfolio, considering bright prospects, let us look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms S&P 500 and the Sector
The Zacks Computer-Storage Devices industry has underperformed the S&P 500 composite and the broader sector in the past year.
The industry has surged 20.6% in this period compared with the S&P 500’s return of 23.2%. The broader sector has gained 29.4% in the same time frame.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month P/E (or Price/Earnings), which is a commonly used multiple for valuing computer storage devices companies, we see that the industry is currently trading at 14.33X compared with the S&P 500’s 21.80X. It is above the sector’s forward 12-month P/E of 26.35X.
In the past five years, the industry has traded as high as 194.54X and as low as 7.71X, with the median being 16.78X, as the charts below indicate.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Forward 12-Month P/E Ratio
3 Computer-Storage Devices to Keep an Eye on
NetApp: Headquartered in San Jose, CA, NetApp is a leading provider of enterprise storage, data management software, and hardware products and services.
NetApp is witnessing higher demand from customers for its portfolio of modern all-flash arrays, especially the C-series capacity flash and ASA block-optimized flash. The new all-flash A-series is also picking up momentum. These enterprise storage products will allow users to boost workloads including traditional enterprise applications and Gen AI. The company expects the new AFF A-series, along with its C-series and ASA products, to capture further share in the all-flash market.
Solid momentum in hyperscaler first-party and marketplace storage services has been driving revenues from the Public Cloud. Public Cloud segment’s revenues improved 9% to $168 million, driven by 43% increases in first-party and marketplace cloud storage services. Driven by strength in the cloud storage business, NetApp now expects cloud revenues to return to double-digit growth year over year from the current quarter.
Also, Keystone’s storage-as-a-service offering has been gaining significant traction, with revenues increasing more than 55% year over year in the fiscal second quarter. Driven by strength across flash, block, AI and cloud storage solutions, management has raised its guidance for fiscal 2025. It now expects revenues to be in the range of $6.54-$6.74 billion compared with the previous projection of $6.48-$6.68 billion.
However, free cash flow for fiscal 2025 is expected to be slightly low on a year-over-year basis, caused by SSD-related cash outflows. A weak macro backdrop and subdued IT spending amid intensified competition in the all-flash business pose headwinds.
Currently, NTAP carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for fiscal 2025 earnings remained up 3.2% at $7.31 per share in the past 60 days. The stock has surged 32.6% in the past year.
Price and Consensus: NTAP
Pure Storage: Headquartered in Mountain View, CA, Pure Storage provides software-defined all-flash solutions that are uniquely fast and cloud-capable for customers. Pure Storage is gaining from momentum in demand for its FlashBlade and FlashArray solutions coupled with solid strength in subscription revenues. It continues to capitalize on the hyperscale opportunity with a lucrative design win for its DirectFlash technology with a top-four hyperscaler.
Pure Storage is gaining from its accelerating customer base. Customer growth had been exemplary, with the count surging from 300 in the first quarter of fiscal 2015 to more than 10,500 in the second quarter of fiscal 2023. In the third quarter of fiscal 2025, Pure Storage added more than 340 new customers. At the end of the quarter, the company’s customer count was more than 13,000, including 62% of the Fortune 500 companies.
Due to a spike in Evergreen//One opportunities valued under $5 million, shifting to traditional sales, management has revised its revenue forecast for fiscal 2025. Although it boosts product revenue expectations, it lowers fiscal 2025 TCV sales growth for as-a-service offerings. It now expects revenues of $3.15 billion, indicating an 11.5% increase from the year-earlier level, up from the prior estimate of $3.1 billion with 10.5% growth. The company also increased non-GAAP operating income guidance to $540 million from $532 million projected earlier. Cautious IT spending, stiff rivalry and mounting losses continue to pose headwinds.
At present, PSTG carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for fiscal 2025 earnings per share for the company stands at $1.68, up 1.2% in the past 60 days. The stock has appreciated 71% in the past year.
Price and Consensus: PSTG
Netlist: Irvine, CA-based Netlist is a leading designer and manufacturer of high-performance SSDs and modular memory subsystems for enterprise customers in various industries. In the last reported quarter, NLST’s revenues skyrocketed 140% year over year to $40.2 million, driven by heightened demand in the memory market. It is collaborating closely with its partners and utilizing the five-year, $600 million supply agreement with SK hynix to deliver innovative solutions to its customers in the near term.
In November 2024, Netlist secured $118 million in damages in a trial against Samsung (Samsung Electronics Co., LTD., Samsung Electronics America, Inc., and Samsung Semiconductor, Inc.). The U.S. District Court for the Eastern District of Texas awarded Netlist following a jury trial involving three of its patents. the company has been on a winning streak, securing multiple jury awards over the past two years. These awards are crucial in Netlist’s mission to safeguard its intellectual property, as it brings the company’s total damages awards from patent infringement cases to a staggering $866 million over the past 19 months.
At present, NLST carries a Zacks Rank #3. The Zacks Consensus Estimate for 2025 earnings per share for the company stands at a loss of 7 cents, unchanged in the past 60 days. The stock has declined 61% in the past year.
Price and Consensus: NLST
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