Investing in Data Storage Hardware Stocks

Once you’ve used a solid-state drive (SSD) you’ll never go back. Those who know the difference between a hard drive and random-access memory (RAM) would easily understand why. An SSD is essentially a hard drive made of RAM, so it’s lightning-fast and constantly available. Booting up becomes a thing of the past because there are no moving parts, and you can open and close your laptop at will without creating any problems with your applications. It’s easy to imagine a future where hard drives become obsolete because they’ve been replaced by SSDs. While it’s not a blue ocean opportunity, it’s still a thesis worth looking at because of this old hockey stick.

Bar graph showing the annual size of the global dataspere
Credit: IDC

Artificial intelligence algorithms are only as good as the big data you feed them. AI chipmaker NVIDIA (NVDA) knows this well. It’s why they pushed to expand their data center segment with the acquisition of Mellanox such that it now accounts for 40% of total revenues. Our recent piece on data center REITs talked about how the demand for warehouses to store all this big data is coming from all directions including large cloud providers like Amazon, Google, and Microsoft. So, why don’t we invest in the devices used to store big data, like hard drives?

HDDs vs. SSDs

Hard disk drives (HDDs) are the traditional method of storing data and they’ve been around for decades. Intel spells it out concisely.

HDDs are a legacy storage technology that use spinning disks to read/write data. SSDs are faster and more power efficient than HDDs. HDDs are priced lower, but SSD prices are dropping.

Credit: Intel

So, our thesis goes something like this. Demand for data storage will be increasing over time regardless of whether data centers are being built by REITs or cloud providers. Data will not stop being generated if the economy hits the skids, so it seems to be a fairly resilient thesis. If we’re going to invest in hard drives, then there are three companies to consider which dominate nearly the entire market – Toshiba, Western Digital, and Seagate.

Bar graph showing HDD Supplier Market Share: Western Digital, Seagate, Toshiba
Credit: Blocks & Files chart using IDC, Coughlin, and TrendForce numbers

There’s nothing disruptive about investing in commodity computing hardware, but maybe we can skate to where the puck will be. Today, 30% of non-archival storage utilizes SSDs, and some subject matter experts believe that could reach 80% by 2025.

By 2025, the cheapest flash storage may be 2.5 times more expensive than the cheapest hard drives, but it could also allow for 2.5 times greater compression, so the cost will balance out.

Huawei’s VP of Data Storage via TechRadar

The Advantages of SSDs

The person behind the above quote believes that superior performance is why ultimately SSDs will disrupt traditional HDDs along with other aspects of data storage. Data storage tapes are still being used in large data centers to provide cold storage backups. At some point in time, it might make sense to replace these tapes with hard drives which allow recovery to take place much faster, not to mention the speed at which SDD backup media might be able to operate. Everyone would prefer that both primary and backup data storage would use SSDs, it’s just a function of cost. That’s because enterprise cloud providers look for three primary features when purchasing data storage hardware – cost, reliability, and performance.

Companies like Confluent (CFLT) that analyze data in real-time would find performance to be a critically important feature since time is of the essence. Tomorrow’s predictive analytics applications like those on offer from C3.ai (AI) can provide insights quicker by accessing the data quicker. An increasingly large number of enterprise software use cases will look to hardware for better performance. There’s also a green element to consider since SSDs consume less power. (More on the cost advantages in a bit.)

Data centre SSD revenues will increase 24.9 per cent CAGR from $7.74bn in 2019 to $23.5bn in 2024. Hard disk drive revenues will decline at -3.8 per cent CAGR. 

Gartner’s first data center semiconductor revenues report via Block and Files

By 2025, most of the world’s stored data will live in the public cloud, according to research from IDC. That means SSD hardware for data centers should be a good niche to invest in. Growth for SSDs is about displacing antiquated storage technologies and leveraging the overall growth of data storage facilities, but we don’t like the idea of investing in a commodity hardware product that decreases in cost every year.

The Hardware Problem

It’s always worth considering what technologies might be around the corner. DNA data storage seems promising in terms of capacity and reliability, but perhaps not performance. The fact we’re still using magnetic-tape data storage technology from the 1980s implies that data storage solutions have some durability. The growth of SSDs seems like a compelling thesis, but we run into the same problem we see with investing in hardware companies like SolarEdge. There need to be some high-margin recurring revenue streams that can keep the pig fat when the margins on commodity hardware dry up.

We also need to consider the raw inputs used to produce SSDs – NAND flash memory. An article last February by Ars Technica talks about how contamination at two factories in Japan could affect the supply of flash memory.

Solid-state storage devices have so far been spared from the scarcity and high prices that the chip shortage has wrought upon graphics cards, cars, Raspberry Pi boards, and innumerable other products. But that may change soon, due in part to a “contamination” at two Japanese factories used by Western Digital and Kioxia to make flash memory.

Ars Technica

It’s not the first time there’s been a flash memory shortage. Back in 2017-2018, prices of flash memory stopped dropping and even increased slightly because of an industry-wide shortage.

Line graph showing that back in 2017-2018, prices of flash memory stopped dropping and even increased slightly because of an industry-wide shortage.
Credit: Wikibon Research

When you’re selling a physical product where pricing is decreasing sharply over time, your margins are constantly under pressure, and you’re subject to risks from the suppliers of physical inputs. It’s just another reason to love software-as-a-service (SaaS) companies.

Flash-Native vs. SSD

The firm that produced the above chart, Wikibon Research, published an extensive research piece late last year on The Business Case for Flash-native which proposes additional factors to consider when doing a cost-benefit analysis for HDD vs. SSD. For example, some companies are forgoing the SSD drives on offer from vendors and utilizing the raw NAND flash chips to allow for completely novel designs which take performance to the next level. This type of hardware referred to as “Flash native” is “far more efficient than SSD architectures in managing the local and remote copies of data, optimizing data placement, and managing multiple levels of NAND technology.” From the customer’s perspective, they’re buying SSD drives that a vendor has customized to perform much better than SSD drives on offer from the usual suspects. When you consider total cost of ownership over a ten-year time frame, Wikibon Research believes that Flash-native comes out ahead.

Bar chart showing that when you consider total cost of ownership over a ten-year time frame, Wikibon Research believes that Flash-native comes out ahead.
Credit: Wikibon Research

Says the research firm:

Wikibon believes that a Flash-native approach, where the primary purchased ingredient is simply the flash chips, will lead to more flexibility and lower costs. In addition, Wikibon believes that the major cloud providers are also working on Flash-native storage solutions.

Credit: Wikibon Research

Conclusion

Investing in traditional data storage methods like HDDs or magnetic storage tapes doesn’t seem like a viable pick-and-shovel play on the growth of big data in the coming years. The move towards storing the world’s data in the cloud, coupled with the increasing need for performance and reliability, means that SSDs for data centers are an appealing investment thesis if we can find a vendor that complements their hardware with high-margin recurring revenues. In a coming piece, we’ll take a look at a company that’s developing their own flash-native hardware offering with an attractive recurring revenue stream.

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