HDD Cycle Strength and Investment Strategy (MS)

1. Demand and Cycle Outlook • Increasing cloud data center investment, increasing AI inference tokens, and increasing demand for data retention are driving HDD demand structurally • Expect supply shortages of approximately 10% in the next 12 months, cycle peak delays to CY28 • With 21-22% annual Exabyte growth and limited price drop (13%) per year, HDD margin of over 45% in early 2027 • HDD still has 3 to 4 times better TCO than eSSD, accounting for more than 80% of cloud storage
2. Prospects and valuations by company • Western Digital raises target price to $171 (previously $99) and Seagate target price to $265 (previously $168), respectively • WDC Up 60% (Top Pick), STX Up 22% • Estimated at WDC EPS of approximately $13 and STX EPS of approximately $21 by 2028, 40% to 70% above consensus • Both companies expect EPS growth of over 35% per annum over three years
3. industrial structural changes • HDD industry is shifting to data storage oligopoly, not just economy-sensitive cycle industry as it used to be • Demand for AI data center construction is expected to be worth 2.9 trillion dollars globally by 2028, 85% of which are AI-specific data centers • Supply-side, new fab expansion requires CAPEX of $5B or more and lead time of 2 years or more → Low possibility of production increase in the short term • Accelerate margin improvement with technological innovation (30TB to 40TB HAMR, UltraSMR)