Western Digital Strengthens SSD Segment - Analyst Blog

In a bid to strengthen its flash-based storage portfolio, Western Digital Corp (WDC) is set to buy Virident Systems Inc. for $685 million. The Virident operations will be integrated into Western Digital's Hitachi Global Storage Technologies unit after the deal is closed.  The company expects the deal to close in the fourth quarter of 2013.

Virident's flash-based storage products are used by enterprises for data center applications. Virident's solutions also cater to cloud computing and virtualization enterprises. The acquisition would further boost Western Digital's market share in the storage space compared to Seagate (STX) and Fusion-io Inc (FIO).

Prominent storage players have been expanding into the solid state drive (SSD) storage market due to the sluggish demand in the PC market. Moreover, increasing demand for thin notebooks and tablets boosted SSD shipments in the first quarter of 2013, according to market-research firm IHS iSuppli.

SSDs have been growing despite their higher prices, because they are faster and more energy efficient than traditional hard drives. They also occupy less space, which makes them more suitable for mobile computing devices. The emergence of thinner laptops and tablets over the past few years has created an ideal market for SSDs, which are therefore entering the higher end of the market. Broader adoption will depend on pricing going forward.

SSDs are also being used in servers due to the reduction in latency, which in turn helps in faster response to real-time applications. E-commerce and financial enterprises need faster response time and thus data centers serving these clients are opting for SSDs for their obvious advantages over the traditional hard drives.

Another study by IDC indicates that revenues from SSDs are expected to reach $7 billion in 2017 from $2.5 billion in 2012. The growth potential in the SSD segment is a big positive for companies such as Western Digital and Seagate because it could help them make up losses stemming from the secular decline in the PC market.

Western Digital has been acquiring companies to strengthen its SSD lineup. The company recently acquired STEC Inc. (STEC) for $340 million. iSuppli estimates that Western Digital retained the top spot in the hard disk market for the fourth year in a row beating Seagate and Hitachi. A strong position in the SSD segment may enable the company to maintain this lead.

Western Digital's strong cash balance ($4.31 billion) and positive cash flow ($684.0 million) enable the company to pursue strategic acquisitions. Additionally, the company's rolling out of new storage devices to attract more customers should be beneficial. However, increased innovation is resulting in higher R&D expenses, which may lead to flatter margins.

Currently, Western Digital shares carry a Zacks Rank #3 (Hold).