Hard disk drives turn hot

ARTIFICIAL Intelligence (AI) tends to fuel a surge in the value of everything it touches.

Even the once-ailing hard disk drive (HDD) sector is seeing that.

While HDDs had historically been the go-to storage solution for personal computers, game consoles and desktop computers, the emergence of solid-state drives (SSDs), which store data electronically using flash memory, changed the landscape.

Yet, SSDs did not spell the end of the HDD.

Today, the two technologies are used alongside each other.

In particular, AI, which is propelling the growth of hyperscale data centres (DC), is creating a huge appetite for cheap, vast amounts of storage.

DCs need to store lots of data, making considerations like cost per terabyte and power consumption important.

HDDs remain significantly cheaper per terabyte than enterprise SSDs, while offering sufficient performance for data that does not need millisecond-level access.

The renewed interest is evident among the world’s three remaining major HDD manufacturers – Seagate Technology, Western Digital Corp and Toshiba Electronic Devices & Storage Corp.

“These three are now competing to commercialise enterprise HDDs exceeding 40 terabytes (TB), with long-term roadmaps targeting 100TB products,” notes Public Investment Bank Research senior analyst Chong Hoe Leong.

Seagate and Western Digital have seen their share prices surge this year as investors reappraise the role of HDDs in the AI infrastructure build-out.

These stocks have risen by more than 170% and 130% respectively year-to-date (y-t-d).

Both companies’ earnings have surged due to robust DC demand. Seagate says it sees “durable long-term demand for mass capacity storage”.

In Malaysia, listed firms Dufu Technology Corp Bhd, JCY International Bhd and Notion VTec Bhd are exposed to the HDD sector, manufacturing components used by the world’s major HDD producers.

Dufu and JCY have risen some 61% and 52% y-t-d.

Trident Analytics chief research officer Peter Lim Tze Cheng says the recent pick-up in these companies’ share prices is driven by the recovery in their earnings after years of weak performance, thanks to growing demand from DCs.

JCY swung back to profitability in its latest quarter with a net profit of RM2.5mil after five consecutive quarterly net losses.

“Previously HDD players faced high inventory levels following the pandemic.

“The likes of Seagate and Western Digital had existing inventories to work through. Also, the entry of new suppliers from China intensified competition,” Lim says, adding that the competitive landscape has since stabilised, while demand has grown so strong that “there is enough room for everyone to grow”.

Notion, however, remains in the red, as losses in its electronic manufacturing services business continue to outweigh growth in its HDD segment.

While Dufu, JCY and Notion are exposed to nearline enterprise HDDs – high-capacity drives used by cloud and hyperscale DCs to store vast amounts of data that do not require immediate access – they have different capabilities.

Public Investment’s Chong points out that market research firm TrendForce forecasts that nearline HDD shipments for DCs will have a compound annual growth rate of 23% between 2025 and 2030.

One notable development in the HDD industry is that the average capacity per drive has been increasing at double-digit rates, leading to strong revenue and storage despite lower physical unit sales.

Whether the recent rally still has legs to run depends on where a company sits in the HDD supply chain. Companies whose operations are tied to the number of physical HDD units sold face structural pressure, compared with those supplying components whose content per drive increases as capacity expands.

This is even more so with the emergence of technologies such as heat-assisted magnetic recording and microwave-assisted magnetic recording which enable data to be packed more densely onto each drive.

Dufu, which manufactures spacers – circular components placed between the magnetic disks inside a HDD to separate them – is less exposed to the number of physical drives sold.

As more magnetic disks are packed into each drive to raise storage capacity, the number of spacers required per HDD also increases.

The shift from aluminium or stainless steel spacers towards titanium ones provides another boost for Dufu.

Titanium spacers command a higher value, with average selling prices (ASPs) estimated to be about three times higher.

“Western Digital is moving toward 12 disks per HDD, while Seagate and Toshiba are working with 10 and 11 disks respectively, with plans to increase the disk count further,” Tradeview Capital senior analyst Tan Jia Hui says.

JCY, meanwhile, sits on the other side of the equation.

Its main HDD-related product is the base plate – essentially the drive’s casing – making its exposure more closely tied to the number of physical HDDs produced.

Unlike its peers, JCY’s produces its base plates through die casting. The company has been gradually expanding its casting capabilities beyond HDDs into other industrial applications including automotive.

“Casting gives JCY a cost advantage by reducing material wastage compared with CNC machining.

“It allows the metal to be first formed into a shape close to the final product, before CNC machining is used to achieve the required precision.

“JCY’s recent strength is its industrial segment, where it has begun producing casting products beyond the HDD sector,” Trident Analytics’ Lim notes.

Foreign exchange (forex) also plays a key role in the fortunes of the companies. Tan sees the recent surge in earnings by local HDD players as largely a favourable forex story rather than demand, given their sensitivity to the US dollar, in which their earnings are denominated.

Currency swings matter because HDD component suppliers like Dufu, JCY and Notion constantly face pressure from their clients to lower prices.

At the same time, their ability to pass on the higher costs through higher ASPs is limited.

“While HDD makers like Seagate and Western Digital may charge more for the finished product when memory prices rise, it does not mean Dufu can charge more for the spacer component it makes, as Dufu’s ASP is negotiated separately and is not linked to the retail price of HDDs.

“As such, a supportive forex helps cushion local HDD players against these margin compressions,” Tan says.