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Why Is the AI Surge Boosting HDD Stocks? Finis Conner Says: Drives Are to AI as Batteries Are to EVsby@hillpot
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Why Is the AI Surge Boosting HDD Stocks? Finis Conner Says: Drives Are to AI as Batteries Are to EVs

by Jeremy HillpotJuly 5th, 2024
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Most hard disk drive (HDD) industry analysts view HDDs as commodities. But the AI boom changes everything, says Finis Conner, founder of the largest HDD manufacturer in the world (Seagate) This article explores Conner’s perspective that “the role of HDDs in AI is as fundamental as batteries are to EVs.”
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As the founder of two Fortune-500 hard disk drive (HDD) companies, Finis Conner has watched HDDs operate like commodities for decades—but the AI boom changes everything. This article explores Conner’s perspective that “the role of HDDs in AI is as fundamental as batteries are to EVs,” and this creates an enormous opportunity for HDD firms to claim their strategic value as innovators for the new era of AI.


Most hard disk drive (HDD) industry analysts view HDDs as commodities. According to Finis Conner: This is all coming together to bring the HDD requirement into the level of, finally, a strategic value. With HDDs enabling AI in the way that lithium batteries enable EVs, access to data storage technology is becoming a hinge point, as either an enabling or a limiting factor in the growth of AI.), who was one of the founders of the largest HDD manufacturer in the world (Seagate). The reason for this is simple:


“When demand for storage exceeds the supply, HDD orders go on allocation—meaning the available supply of HDDs is distributed based on priority or existing contracts. Orders are also made further into the future. This scarcity of drives causes prices to go up, but historically, the effect is temporary. Soon enough, HDD manufacturers increase production, the available supply rises—and prices and profits settle back down again.”


This understanding is particularly critical now. That’s because the prices of drives and HDD stocks are skyrocketing again—up 60-70% on average from this time last year. But this time, prices and profits might not be settling back down again. Conner believes that—given the unprecedented rise of AI and its total dependence on HDDs plus the fact that drives are as essential to AI as batteries are to EVs—HDD stock prices could be forming a new floor.


Below, we discuss Conner’s perspective that this HDD on-allocation period is more than just a temporary cycle. In fact, he sees it as an opportunity to upgrade the status of hard disk drives in the global tech economy. With over 50 years of experience in tech, Conner’s insight and leadership illuminate a clear and practical path.


But first, let’s investigate why HDD stocks are on the rise.

Why Are HDD Stocks Booming?

The reason HDD stocks are booming is primarily because of the AI industry’s insatiable demand for quality, up-to-the-minute data—and therefore, a place to store it. On the one hand, AI needs as much data as possible to train more powerful, efficient, and accurate algorithms.


With more and better data, these algorithms can see further and more clearly into the future, while automating better work output. On the other hand, generative AI systems are creating mountains of data too.


All of this increasingly valuable data needs somewhere to store it. With HDDs being the primary means of storing data—usually in large “cloud” storage centers—the HDD market is currently experiencing a supply shock, and AI is the primary driver of the demand.


To better explain the urgent need for greater storage capacity in the new AI economy, Conner likens AI’s hunger for HDDs to the way electric vehicles need batteries:


“Every electric vehicle needs energy. Therefore, it needs a battery to store that energy. Just the same, every AI needs data for training purposes, and it also needs data to analyze and generate quality output—not to mention the large amounts of data AI generates. Whether it’s a cloud data center or an on-site server, this data needs to take up space on a physical HDD somewhere in the world. Without those HDDs, and a continual supply of them, you can’t have AI.”



Just like processors for AI have become increasingly important and valuable in recent years, it’s easy to understand why disk drives c are also of strategic importance to AI. The latest publicly available research from IDC predicts that the size of the Global Datasphere will rise to 175 zettabytes (175,000,000,000,000 gigabytes) by 2025 (more on this below). The increase in data, largely driven by AI, means that more HDDs will be needed.


Still, there’s another important reason for the intensity of the current on-allocation cycle (where HDD orders are being placed further into the future due to limited supply).

COVID Has Made the Present HDD Supply Shock Even Stronger

The last major disk drive supply shock happened during the 2011 floods in Thailand, which was home to at least 40% of the world’s HDD manufacturing plants at the time. It was a disaster that disrupted drive production, causing temporary shortages and short-term price increases.


However, unlike the last on-allocation cycle, this HDD bull run has different factors in the mix. Pandemic-related slowdowns forced the top three HDD manufacturers—and many parts vendors—to scale back production and close down manufacturing facilities. This has reduced the availability and outflow of drives.


Because AI’s increasing demand for storage comes immediately after the COVID business slump, the on-allocation HDD cycle we’re experiencing now is particularly powerful.


In a September 2023 article, Conner predicted that it would take time to bring the HDD supply chain and distribution engines back online in the wake of the pandemic, and it could trigger an on-allocation supply squeeze for drives.


As it came to pass, AI’s ravenous hunger for storage has quickly eaten through the pandemic-era surplus, sparking this on - allocation supply squeeze. Firms that need drives are now placing orders further into the future—and it’s sending the prices of HDD stocks through the roof.


The following table shows the performance of HDD stocks now compared to September 2023:


Access to HDDs Is a Strategic Necessity for AI Industry Firms

The above-referenced trends reveal that hard disk drives have strategic importance for the entire tech industry, especially the AI field. For example, when examining the market caps of the six leading AI sector firms, the strategic value of having access to HDDs becomes clear.


The combined market caps of the leading six AI sector firms—including Meta, Google, Amazon, Apple, Microsoft, and NVIDIA—total over $15 Trillion in value. Not surprisingly, these same firms also represent six of the seven most valuable companies in the world.



Here, Conner adds a potentially alarming perspective:


“With only three suppliers of HDDs for the world—and with the rapid growth of data due to AI and therefore the need for more HDDs—the HDD industry has finally elevated from the status of a commodity to become a strategic component.”


“The business models of the top-six trillion-dollar Tech companies depend heavily on the continued availability of drives. But HDDs are in short supply, and the AI boom is making them scarcer and scarcer. On top of that, there are only three suppliers of HDD serving the global need (Seagate, Western Digital, and Toshiba), and their total market cap is about $61 billion. This illustrates the strategic value of those three suppliers.”


Given the strategic value of HDDs for the most valuable companies in the world, this is the primary reason Conner suspects that this on-allocation cycle is different from previous ones, and HDD stock prices may be forming a floor for further growth.

The Global Datasphere Is Growing to 175 ZB by 2025

Here, it’s important to circle back to the above-referenced research from IDC, which is key to understanding just how much AI and related Internet of Things (IoT) use cases need storage. According to IDC:


“The summation of all [data being stored], whether it is created, captured, or replicated, is called the Global Datasphere, and it is experiencing tremendous growth. IDC predicts that the Global Datasphere will grow from 33 Zettabytes (ZB) in 2018 to 175 ZB by 2025.” (Paraphrased in brackets for clarity)


To put 175 ZB into perspective, IDC also states:


“If you were able to store the entire Global Datasphere [175 ZB] on DVDs, then you would have a stack of DVDs that could get you to the moon 23 times or circle Earth 222 times.”


That’s more than a fivefold increase in just seven years. The explosive growth of the Global Datasphere underscores the critical need for robust and scalable storage solutions for AI.



Adding more fuel to the fire, the above-referenced post-COVID global supply chain disruptions haven’t stopped. They continue to affect multiple industries, including the semiconductor and electronics sectors. According to Nada R. Sanders, Professor of Supply Chain Management at Northeastern University, “Overall stress in supply chains remains high.” This stress is exacerbating supply constraints across multiple markets. Sanders further points out that:


Companies now fearful of shortages are moving toward carrying inventory. Since the pandemic began, many have been shifting from a ‘just-in-time’ to a 'just in case' model."


These changes in approach to inventory—coupled with the real and present geopolitical risks to global supply chains in China, Taiwan, and elsewhere in Asia—could intensify the current HDD supply constraints as more firms order drives to have on hand before they need them—and before HDD prices go up. Such views are also supported by 2023 research on geopolitical disruptions in global supply chains from University of Sussex Business School Professor Lukasz Bednarki. Bednarki concluded:


The impact of geopolitical disruptions on supply chains can be mitigated through [...] moving away from just-in-time delivery models.


Together with the explosive growth of AI and its need for storage, all of these trends are driving up HDD prices and demand—adding further support for Conner’s perspective that this on-allocation HDD cycle isn’t temporary.

How HDD Manufacturers Can Seize the Opportunity

Due to (1) AI’s increasing need for storage, (2) the massive increase in the Global Datasphere (from 33ZB to 175ZB by 2025), (3) the continuing supply chain disruptions, and (4) increasing geopolitical instability that could further disrupt technology and manufacturing supply chains, Conner says that the higher profits and revenue of HDD firms at this time could be used to catch a long-term wave of growth.


According to Conner, the best way to leverage this on-allocation cycle is for HDD firms to move away from operating as commodities and differentiate their offerings through innovation:


If HDD manufacturers strategically position themselves in today’s marketplace as absolutely essential to solving critical pain points for the new AI economy, they could seize a generational opportunity to differentiate themselves in a radically transforming marketplace.


When the focus is more on production and competitive pricing, instead of innovating new storage solutions, HDD manufacturers are not differentiating themselves. They’re just selling a commodity. As a result, profits are just a reaction to the on-off allocation cycle. By contrast, HDD firms that differentiate their products to meet the needs of emerging markets, such as artificial intelligence, have a better chance of securing profits—essentially by providing an innovative product that allows them to escape the supply vs. demand ‘commodity’ cycle.


“I’m hoping that the current market conditions of higher, AI-driven demand don’t simply follow similar examples from the past. In those cases, manufacturers increased capacity so fast that they lost the ‘allocation value’ and moved back into ‘commodity’ mode, where they were once again competing on price and production capacity instead of differentiating themselves in the market.”



With these thoughts in mind, HDD manufacturers will hopefully continue to direct some of their profits from the ongoing boom cycle toward innovating unique solutions to showcase their strategic value in the new AI economy.


In terms of looking ahead, Conner also mentioned:


HDD manufacturers may also want to focus on providing new sourcing locations that reduce exposure to geopolitical tensions and supply chain risks—including reshoring to the U.S.”

The HDD AI Innovation Trend Is Already Taking Root

Among the top three HDD manufacturers, the trend of providing solutions for AI is already taking root. Here’s what the top three firms have recently announced:

Seagate

The Mozaic 3+ platform by Seagate is designed to meet AI’s increasing storage demands. With its new Heat-Assisted Magnetic Recording (HAMR) technology, Mozaic 3+ is surpassing previous limitations on storage density, allowing data centers to double their capacity without expanding their physical footprint, while also saving on energy costs.


Seagate also plans to introduce drives with capacities reaching 30TB by FY2024.


According to Tom’s Hardware, “Seagate is also working on its Mozaic 4+ platform that will enable 40TB+ HDDs and is due in a couple of years (2026), as well the Mozaic 5+ platform that will power 50TB+ hard drives and will launch in 2028 or later.”


These innovations are helping to position Seagate to meet the growing data storage needs driven by AI and other data-intensive applications. This recognition of needs for storage is a major investment in the future.

Toshiba

Toshiba is addressing the needs of AI systems by leveraging new recording technologies—such as Flux-Controlled Microwave-Assisted Magnetic Recording (FC-MAMR) and Microwave Assisted Switching Microwave-Assisted Magnetic Recording (MAS-MAMR). These enable Toshiba to significantly boost recording densities, ensuring high performance and reliability for AI systems.


Toshiba also plans to introduce drives with capacities reaching up to 35TB by the end of FY2024 and beyond 40TB by 2026. This strategic push aims to support the ever-growing data storage needs driven by AI and other data-intensive applications.

Western Digital

Western Digital (WD) is addressing AI's increasing storage demands through its AI Data Cycle framework, which helps customers plan and develop advanced storage infrastructures that maximize AI investments, improve efficiency, and reduce total costs. By strategically aligning its flash and HDD product roadmaps with the storage requirements of each stage in the AI data cycle, WD hopes to provide solutions that support high-performance and scalable AI workloads.


WD also introduced the Ultrastar DC SN861 SSD, which WD says offers better random read performance and improved power efficiency for AI workloads, with capacities up to 16TB. Finally, WD plans to release high-capacity solutions tailored for AI—such as the Ultrastar DC HC690 UltraSMR HDD with 32TB capacity, designed for massive data storage in hyperscale cloud and enterprise data centers.

Could One Hard Drive Manufacturer Differentiate Itself as the HDD Industry’s NVIDIA?

It’s possible that one HDD manufacturer could differentiate itself as the HDD industry’s equivalent of NVIDIA for the AI sector. As the leading chip manufacturer in the AI space, NVIDIA's GPUs are now indispensable.


This is why, in June 2024, NVIDIA temporarily became the most valuable company in the world with a $3.33 trillion market capitalization. At the time of this writing, NVIDIA sits at number 3. Therefore, NVIDIA serves as a compelling example for HDD manufacturers aiming to establish a similar strategic value.


Conner adds the following:


“As an indispensable and enabling component of AI—just as important as batteries are to EVs—it’s time for HDD firms to claim their strategic value in today’s rapidly changing tech economy.”


Conclusion

In conclusion, Conner says he hopes to see the following for the HDD industry in the coming years:


“With the introduction of AI, we’re in a pivotal time where AI is providing new and powerful solutions that are reshaping the world and the global economy. We know that these AI solutions will require faster access to increasing quantities of data, and they will be generating increasing amounts of new data too.


This is all coming together to bring the HDD requirement into the level of, finally, a strategic value. With HDDs enabling AI in the way that lithium batteries enable EVs, access to data storage technology is becoming a hinge point, as either an enabling or a limiting factor in the growth of AI.


The HDD manufacturers that succeed in providing higher storage capacity and higher speeds to fuel and enable the growth of AI may be able to continue riding the ongoing allocation wave to serve deeper and more important waters in the years ahead. These firms will be doing a great deal more than providing essential commodities. They’ll be innovators, and they will be solving critical problems to enable the expansion and value of AI capabilities.”