Important Trends in Tech: Storage

• Posted by Tech Insidr
• on March 7th, 2011

The rise of solid state hard-drives and NAND-based solutions has turned the storage market on its head.  SSD adoption has steadily increased while demand for traditional HDD’s has been flat to down.  With tablets cannibalizing PC sales, it’s not out of the question to predict even more slowdown in the HDD space.

The SSD market is especially close to home for me since I worked as the lead Financial Analyst supporting a $10+M/year R&D group with a focus on SSD and other NAND Products.

So why are SSD’s and NAND all the rage right now?  Here are a couple bullet points why this technology is a game changer.

1. Performance – The performance increase from SSD’s is just astounding.  For years, folks have talked about finding the PC bottleneck but it turns out the bottleneck has been the slow-moving 7200 or even 5400RPM HDD.  Enterprise IT administrators are starting to realize the benefits of SSD’s especially with intense workload applications like MySQL Databases.  Intel recently rolled out their NAND-based “Thunderbolt” technology to consumers, which boasts a throughput of 10GB/s.  What bottleneck?
2. Cost –  Due to advances in manufacturing, each year the cost of SSD’s will decrease by 50% and the storage capacity will increase by 2X.  Similar to Moore’s law, SSD’s keeps shifting to more efficient NAND that will give them more space at less of a cost.  Most of the SSD’s these days are using 34nm NAND but 25nm NAND is on the horizon.  As NAND manufacturing continues to advance, prices for SSD’s will continue to drop and uptake will increase.
3. Form Factors – SSD’s can be placed in a variety of form factors where traditional HDD’s simply do not work.  NAND Products are finding themselves in a number of hot consumer electronics devices, but the biggest design wins are smartphones and tablets.  A huge amount of growth is taking place in both of those spaces and NAND is a critical component that makes those devices work.  Without a NAND-based solution, a device like the iPad simply would not be possible.  The key takeaway is that NAND is pushing the boundaries and allowing for new form factors that were previously impossible.

The broad theme is that NAND solutions have fundamentally reshaped the storage market.  Consumer demand for high-end devices like the iPhone and iPad, has shifted the demand curve from slow HDD storage to agile NAND-based storage.  Big players in the NAND ecosystem like Samsung, Micron, and Sandisk continue to benefit from his trend.

HDD incumbents like Seagate and Western Digital have watched their shares plummet in the past month, with -17% and -13% declines respectively.  With no NAND or SSD products in the market, Seagate and Western Digital stand to condede even more ground in the storage market.

So exactly how big is the opportunity for SSD’s and other NAND-products?  Think big.

According to one analyst,  solid state drive adoption within the enterprise segment is projected to grow from 150,000 units to 4,100,000 units in 2015.   Enterprise SSD revenues are also projected to grow to $3.8B by 2014.

Enterprise is one key area where SSD’s make the most sense.  Why?  Because in the enterprise segment, performance matters the most.

The benchmark above illustrates the huge performance gap between a SSD and some other storage alternatives.  As you can see, the SSD outperforms the other drives by a wide margin on the basis of IOPS, which is an industry standard used to measure the input/output capability of hard drives.

As Solid State Storage technologies and NAND manufacturing advances, these performance increases will be even more dramatic.  Also, drive capacities will increase and manufacturing costs will decline.

The SSD space is poised for additional growth in the coming years and my top pick in this segment is STEC Inc.

STEC has established themselves as the industry leader in the high-end enterprise SSD.  While STEC may not be a popular brand among consumers, they have gained Tier-1 Qualification from high end enterprise and storage companies, with EMC as their biggest customer.

Gaining qualifications in the enterprise space is an extremely rigorous and robust process.  Vendors like EMC have extremely specific requirements that each drive must meet in order to gain qualifications.

Popular SSD vendors like Sandisk and Micron are unable to meet these rigid standards. Since their drives are more geared towards consumers, they are unable to meet the failsafe quality standards of an “enterprise” drive. STEC has already established themselves as a quality vendor to these tier 1 customers, it will be very difficult for competitors to make in roads into their market.

Here is a quick slide from a recent STEC investor presentation with projections on the Enterprise SSD Market.  As you can see from the forecast, the market is poised to grow in the years ahead as SSD’s gain traction.

STEC stands to benefit from this robust growth in the enterprise segment and I think there is even more upside.  STEC is my top pick in Storage and I think they should have a strong 2011 as enterprise spending ratchets up.

The Strategy: Long STEC @ 20.29

You are probably wondering why I picked STEC over bigger NAND players like Sandisk or Micron.  The answer is pretty simple actually – there are three reasons.

So why not Micron or Sandisk?

1. DRAM Spot Price Dependency – Sandisk and Micron depend on DRAM spot prices, which fluctuate based on seasonal trends and other risk factors.  When DRAM prices are high, these vendors can sell their NAND/SSD’s at a premium, but when DRAM prices are weak it has a serious effect on their cash flow.  It’s a feast or famine cycle that I want no part of.  STEC is not immune to the effects of DRAM prices, but they are more protected since they are selling drives based on raw performance, not price.
2. Margins, Margins, Margins - Historically, in the hardware sector, the highest margin customers are in the enterprise space.  High end server chips from AMD/Intel may cost $20 to manufacture, but they sell for $600 per cpu – resulting in huge margins.  The storage space is no different at all.   For consumers, price is much more important than performance, but it’s a completely different game for IT administrators.  Enterprise customers put a premium on performance and they are willing to pay serious coin to get it.  STEC occupies the highest margin area of the SSD market, whereas Sandisk/Micron sell mostly through the price-conscious consumer channel.
3. Hot Acquisition Target – Since STEC is a much smaller company (market cap wise) than Sandisk or Micron, they stand to be a very attractive acquisition target for a company like Seagate or Western Digital.  STEC holds a very expansive patent portfolio and has some of the premier engineering talent.  For a company looking to make a big splash into the SSD market, an STEC acquisition would make a lot of sense.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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