Data Storage Stocks Reporting Earnings this Week: WDC, STX

Yesterday we saw earnings reports of some of the bellwethers in the Technology sector like Apple AAPL and Twitter TWTR. Apple missed on earnings for the first time in at least a year mainly due to weaker iPhone sales and soft comps in China. However, social media staple, Twitter managed to top earnings expectations in spite of lower–than-expected revenues.

With the Q1 earnings cycle in full swing, more tech companies are slated to report quarterly numbers in the next couple of days. In addition major semiconductor stocks, like SanDisk SNDK, Xilinx XLNX and Texas Instruments TXN, this week, investors will be focused on performance of two data storage solution providing companies – Western Digital WDC and Seagate Technology STX.

Western Digital is the largest manufacturer of hard-disk drives (HDD) in the U.S., with a rough 44% share of the market, followed closely by Seagate, which has a 40% share. Naturally, both the companies derive the bulk of their revenues from PCs, which are still the primary users of HDD.

However, over the past few years, cannibalization of PCs by mobile devices has been hurting top and bottom lines of the two companies. Data storage used to be a hot commodity back when PCs and laptops ruled the roost in the enterprise and personal digital communication space. But with the rise in popularity of handheld devices, the HDD, flash memory, solid-state and data-center solutions businesses have lost their stature in a significantly short period of time.

Further, exponential growth in the amount of data, complexity of data formats and the need to scale resources at regular intervals have compelled several companies to turn to cloud computing vendors. Cloud solutions require lower storage costs, provide easier and faster access, and offer stronger security and recovery modes. Reducing the need to purchase and maintain hardware has propelled cloud-based solutions to a top priority.

As a result of these factors, the future of data storage companies appears gloomy. Let's see what's in store for the two major data storage stocks.

Western Digital is set to report third-quarter fiscal 2016 results on Apr 28. Last quarter, the company posted a positive earnings surprise of 4.58%. Notably, in the preceding four quarters, the stock has surpassed the Zacks Consensus Estimate twice and missed the same in two.

To deal with the aforementioned situation, the company is focusing on the enterprise side, where it has the scope to acquire higher-margin businesses. Synergies from acquisitions and product innovations are other growth catalysts. We believe that this will boost third-quarter margins and reduce Western Digital's dependence on the PC market. (Read more: Western Digital Q3 Earnings: What's in the Cards?)

Seagate Technology is set to report third-quarter fiscal 2016 results on Apr 29. Last quarter, the company posted a positive earnings surprise of 15.49%. Notably, Seagate has surpassed the Zacks Consensus Estimate in three of the last four quarters and met the same in one, with an average positive surprise of 11.04%.

We note that Seagate is following into the footsteps of Western Digital and is focusing on the enterprise side, product innovations and acquisitions in order to counter the bleak market conditions. (Read more: Seagate Q3 Earnings: Stock Likely to Miss Estimates?)

Check back later for our full write-up on the earnings releases of these stocks.

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