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Morgan Stanley Downgrades The Cloud: Cuts Western Digital, Seagate, QLogic & Aspeed

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Morgan Stanley Downgrades The Cloud: Cuts Western Digital, Seagate, QLogic & Aspeed

In a report published Wednesday, Morgan Stanley analyst Katy Huberty commented on the Cloud sector, noting the space is "cloudy with a chance of revisions."

According to Huberty's research, the Cloud space is expected to experience a 20 percent growth rate in 2015, based on a combination of some of the largest companies guidance and her own estimates. The analyst said a 20 percent growth rate actually marks a deceleration from the "strong" 37 percent growth seen last year.

"Cloud data center growth has provided a cushion to offset weak spend in traditional enterprise & consumer segments in the past 3 years," Huberty wrote. "We think the cushion may thin near-term and offer greater visibility on underlying weakness in enterprise & commercial segments."

Huberty further expanded that a June survey with Chief Investment Officers suggests "incremental enterprise IT budget weakness" which combined with a Cloud capital expenditure downtick results in "significant" estimate risks and downgrades for Western Digital Corp (NASDAQ: WDC), Seagate Technology PLC (NASDAQ: STX), QLogic Corporation (NASDAQ: QLGC) and Taiwan-listed Aspeed Technology Inc.

Related Link: 'Huge Cloud Growth' Expected For Microsoft Earnings, Not Much Else

Western Digital: Volume Declines Only Partially Offset By Flash

According to Huberty, Western Digital's volume declines and less favorable mix will only be partially offset by "strong growth" in its flash business. As such, the analyst lowered her gross margin estimates to 28.7 percent from a previous 31 percent estimate in fiscal 2016.

Shares were downgraded to Equal-Weight from Overweight with a price target lowered to $70 from a previous $113.

Seagate: Incremental Risk From China Cloud Customers

According to Huberty, Seagate generates a large portion of its demand from cloud customers in China which should be viewed as an "incremental risk" to estimates given the country's recent stock market volatility.

The analyst also noted that a less favorable mix and a continued drag from its Xyratex business will "pressure" margins to the low-end of its long-term range in fiscal 2016, with the potential for further downside if enterprise and cloud remains weak for an extended period of time.

Shares were downgraded to Underweight from Overweight with a price target lowered to $34 from a previous $49.

QLogic: Lower Fibre Channel Adapter And Ethernet Revenue Estimates

Huberty lowered her revenue estimate for the Fibre Channel Adapter and Ethernet space to reflect a "normal to below normal" seasonality. QLogic derives 67 percent of its revenue from Fibre Channel Adapters and 25 percent from Ethernet products.

As such, Huberty is now expecting the company to realize a 3 percent year-over-year decline in revenue during 2015 (after previously estimating a 1 percent decline). The analyst's earnings per share estimates has dropped accordingly for the full fiscal year to $0.90 from a previous estimate of $0.96.

Shares were downgraded to Equal-Weight from Overweight with a price target lowered to $12 from a previous $14.

Aspeed: Revenue Tracking Below Estimates

Finally, Huberty commented on Taiwan-listed Aspeed, noting that 90 percent of its revenue are derived from its server board management controller (BMC). Despite the fact that the company has a 25 percent global market share in the BMC chip, revenue for the first half of 2015 has been tracking below the analyst's estimates with no signs of market share or average selling price issues.

Huberty noted that Aspeed's revenue shortfall was "purely demand-driven" and offers further evidence that "server demand will not recover sharply in the second half of 2015."

Shares were downgraded to Equal-Weight from Overweight.

Latest Ratings for WDC

DateFirmActionFromTo
Apr 2019MaintainsBuyBuy
Apr 2019MaintainsNeutralNeutral
Apr 2019DowngradesBuyHold

View More Analyst Ratings for WDC
View the Latest Analyst Ratings

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