UBS Discusses Shift In Storage; 'Most Negative' For Seagate Technology And NetApp

In a report published Friday, UBS analyst Steven Milunovich discussed a growing shift in enterprise storage – a move to all-flash storage.

According to Milunovich, AFA (all-flash array) use has risen from 6 percent of enterprises in 2013 to 22 percent today, while over 40 percent of CIOs surveys have indicated the need for AFAs. The surge in demand may stem from the fact that AFAs are cost effective, as $3.2 million of hybrid arrays can be replaced with $400,000 in all-flash arrays.

Compressing Revenues

Milunovich continued that a shift to AFAs could "compress" the revenues of systems vendors and cause "major problems" for disk drive makers.

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The analyst suggested that Seagate Technology and NetApp are the most exposed, as Seagate could suffer a 19 percent revenue hit in the medium term and 42 percent hit in the long-term. NetApp's downside is even worse with the analyst projecting a 22 percent near-term revenue decline and 63 percent decline to its long-term revenue profile.

'Less Negative' Stocks

Meanwhile, the analyst stated that the shift is "less negative" for EMC Corporation (NYSE: EMC) and Western Digital Corp (NASDAQ: WDC), as the companies are "less exposed" with "better flash products."

In addition, International Business Machines Corp. (NYSE: IBM) and HP Enterprise will only see a "minimal impact" with their revenues impacted in the 1 to 3 percent range.

AFA Trend Is A Positive For Semiconductors

Milunovich further added that the shift toward all-flash arrays is a "net positive" for the storage semiconductor suppliers and that the "greatest incremental opportunity" is for NAND flash suppliers, including Intel Corporation (NASDAQ: INTC).

The company's flash memory business has a "strong focus" on enterprise opportunities, where its average selling prices and margins have proven to be "more resilient" compared to consumer products.

Milunovich also pointed out that Micron Technology, Inc. (NASDAQ: MU) is "making steady progress" in developing its enterprise NAND portfolio, with SSDs that support the CIe, SAS and SATA interfaces.

However, the company has "the most room to improve" in terms of enterprise grade SSD controller technology.

Finally, SanDisk Corporation (NASDAQ: SNDK) has the "most comprehensive" enterprise NAND flash product portfolio given its approximately 10 percent of sales derived from the end market.

In addition, enterprise sales are the highest margin segment for the company and its acquisition of Fusion-io has transformed itself into "one of the leading" PCIe NAND cache card franchises along with a popular software platform.

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