Disk-drive demand continues to be warped by the rapid adoption of Chia, a cryptocurrency that relies on large capacity drives to “farm” new coins.
As Barron’s has written, Chia uses a different model than other cryptocurrencies to create new coins. Most cryptocurrencies rely on a “proof of work” model to verify transactions: Miners solve complex mathematical problems that require lots of computational power to earn coins, which explains why traditional mining is so energy-intensive.
Chia’s approach, by contrast, is tied to storage capacity committed to being used on the blockchain, rather than computational might. And that is warping demand for high-capacity drives.
In a research note on Thursday, Loop Capital analyst Ananda Baruah asserts that both Seagate Technology Holdings (ticker: STX) and Western Digital (WDC)—which together control most of the world’s disk-drive production—could see a sustained boost to both pricing and profits from the Chia-driven acceleration in demand for high-capacity drives.
While the impact on drive pricing from Chia farming has largely been at the retail level and through distributors, Baruah sees the trend overflowing to contract pricing if the Chia trend is sustained, with higher prices possible for drives sold to both cloud-computing companies and major data-storage systems companies like Hewlett Packard Enterprise (HPE), Dell Technologies ‘ (DELL) EMC unit, and NetApp (NTAP).
He contends that both Seagate and Western Digital have begun holding conversations on shifting average selling prices higher. And he adds that “if all of this holds, gross margin expansion could have a long way to go.”
With distributor inventories depleted, Baruah adds, the hard-drive suppliers are “in prime position” heading into the calendar second half to see elevated pricing. He notes that the last time there was an event-driven price reset in the drive market was 10 years ago, when severe flooding in Thailand knocked out a substantial portion of drive manufacturing capacity. This time, he says, there is less excess capacity in the system, with limited suppliers of both recording heads and magnetic media constraining the ability to satisfy demand.
Baruah maintains his Buy ratings on both Seagate and Western Digital. He has price targets of $100 on Seagate and $90 on Western. Both stocks are lower in recent trading, with Seagate off 3.7%, at $89.22, and Western Digital down 1.7%, at $72.01. The S&P 500 index is up 0.1%.
