Zacks Industry Outlook Highlights Super Micro Computer, NetApp and Pure Storage
For Immediate Release
Chicago, IL – October 21, 2024 – Today, Zacks Equity Research discusses Super Micro Computer, Inc. SMCI, NetApp NTAP and Pure Storage PSTG.
Industry: Computer Storage
Link: https://www.zacks.com/commentary/2353054/3-storage-devices-stocks-to-gain-from-positive-industry-trends
The Zacks Computer-Storage Devices industry players are likely to gain from 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 Super Micro Computer, Inc., NetApp and Pure Storage.
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 is driving the proliferation of IoT, Advanced Driver Assistance Systems and Augmented Reality/Virtual Reality devices. However, global macroeconomic turbulence is a significant headwind in the near term, along with volatile supply chain dynamics and inflation.
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
New Normal Trends & 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.
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 Artificial Intelligence 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.
Increases in IT Spending Bodes Well, Macro Conditions are a Concern: Per thelast report from Gartner, worldwide IT spending is projected to reach $5.26 trillion in 2024, indicating an increase of 7.5% from 2023 levels. This is an improvement over the earlier projection of overall spending of $5.06 trillion but marks a decline from the previous growth projection of 8%.
The report also highlighted that data center systems spending growth is anticipated to be 24% in 2024, up from the previous projection of 10% growth. The upside will be driven by the increasing compute power demand owing to the rapid proliferation of Generative AI. However, Gartner stated that IT services spending is now projected to grow 7.1% in 2024, down from 9.7% projected earlier. This is mainly due to sluggish spending across subsegments, including business process services and consulting.
However, uncertain global macroeconomic conditions and supply chain dynamics are a drawback. 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.
Decline in PC Shipments: Worldwide PC shipments declined 1.3% year over year in the third quarter of 2024, per a Gartner report. The research firm noted that the demand for the Windows PC refresh due to Windows 10 support in 2025 did not fully pick up, mainly due to economic issues in certain regions. The report added that despite the third-quarter decline, global PC demand will pick up pace toward the end of 2024. PC demand will witness solid growth in 2025, owing to the peak PC refresh cycle.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Computer Storage is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #71, which places it in the top 28% 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 bright 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.
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 Outperforms Both S&P 500 and the Sector
The Zacks Computer-Storage Devices industry has outperformed the S&P 500 composite index and the broader sector in the past year.
The industry has surged 54.5% in this period compared with the S&P 500’s return of 34.8%. The broader sector has gained 41.3% in the same time frame.
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 15.88X compared with the S&P 500’s 22.2X. It is above the sector’s forward-12-month P/E of 26.81X.
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.
3 Computer-Storage Devices Stocks to Add to Watchlist
NetApp: Headquartered in San Jose, CA, NetApp is a leading provider of enterprise storage, data management software, and hardware products and services.
Strength in the all-flash portfolio and growth in first-party and marketplace cloud storage services are aiding NetApp’s performance. Continued demand for the company’s All-Flash Array portfolio is a key growth driver. In the last reported quarter, it added the RPO metric as a new disclosure, which came in at $4.5 billion, buoyed by strength in its Keystone offering.
Driven by momentum across flash, block, AI, and cloud storage solutions, management has raised its guidance for fiscal 2025. It now expects revenues in the range of $6.48–$6.68 billion compared with the previous band of $6.45–$6.65 billion. Share repurchases and dividend policy are noteworthy. A weak macro backdrop and muted IT spending amid intensified competition in the all-flash business pose headwinds.
Currently, NTAP sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for fiscal 2025 earnings remained up 3.4% at $7.08 per share in the past 60 days. The stock has surged 68.8% in the past year.
Super Micro Computer: This San Jose, CA-based company is a total IT solution manufacturer for AI, Cloud, Storage, and 5G/Edge technologies. SMCI’s rack-scale plug-and-play Total AI and IT Solutions (especially the Deep-Learning and LLM-optimized ones based on NVIDIA HGX-H100) are gaining substantial traction. Its efforts to gain further share in the AI infrastructure market with a ramp of new products, including innovative Direct Liquid Cooling (DLC) designs, bode well.
In the last reported quarter, revenues skyrocketed 143% on a year-over-year basis to $5.31 billion, driven by robust demand for new AI infrastructures. Management added that the investments made in Malaysia and Silicon Valley facilities will further bolster its supply chain, and help it achieve economies of scale.
Management expects revenue for the fiscal first quarter to be $6 billion to $7 billion and for the fiscal year, SMCI expects net sales of $26 billion to $30 billion.
SMCI carries a Zacks Rank #2 (Buy) currently. The Zacks Consensus Estimate for fiscal 2025 earnings per share for the company stands at $3.35, unchanged in the past 30 days. The stock has appreciated 79.6% in the past year.
Pure Storage: Headquartered in Mountain View, CA, Pure Storage provides software-defined all-flash solutions that are uniquely fast and cloud-capable for customers.
Momentum in its FlashBlade solutions, including FlashBlade//E and subscription-based offerings, is cushioning Pure Storage’s performance. In the last reported quarter, subscription revenues were up 25% year over year. Management continues to expect revenues of $3.1 billion for fiscal 2025, suggesting a rise of 10.5% year over year.
However, it lowered the guidance of TCV sales for Evergreen//One & Evergreen//Flex subscription service offerings due to fewer deals closed in the first half of 2024 than the prior year. The company now projects TCV sales to be $500 million, down from $600 million guided earlier. Intense competition, a subdued macroeconomic backdrop, and mounting losses continue to pose headwinds for Pure Storage.
At present, PSTG carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for fiscal 2025 earnings per share for the company stands at $1.66, up 1.2% in the past 60 days. The stock has appreciated 66.9% in the past year.
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