According to reports, Toshiba Corp. plans to double its hard disk drive (HDD) production capacity for AI data centers by fiscal year 2027 compared to fiscal year 2025, and has set a mid-term goal of raising its market share to 30%. This news caused the "HDD duopoly" Seagate Technology (STX.US) and Western Digital (WDC.US) to fall more than 10% last Friday. Goldman Sachs released a research report pointing out that Toshiba's capacity expansion is unlikely to change the profitability landscape of the HDD duopoly in the short term, but may suppress their valuations in the medium term; the upstream Japanese components and materials supply chain is seen as the main beneficiary.
Goldman Sachs Assessment: Toshiba's Expansion Intent Is Clear, but Execution History Is Questionable
Based on recent communications with industry experts, Goldman Sachs believes that Toshiba does indeed intend to expand HDD production capacity, and this intent is corroborated by its partner TDK's plan to expand magnetic head production. However, Goldman Sachs also cautioned that at its 2022 investor day, Toshiba stated it would expand capacity, raise its market share from 17% at the time to 25% by 2025, and mass-produce 40TB capacity HDDs during the same period — none of these goals were fulfilled. Toshiba's current market share is only 11%. Nevertheless, considering that the HDD industry's current profitability and growth rate far exceed those of the past, Goldman Sachs believes Toshiba has a strong incentive to capitalize on current market conditions and will likely attempt to advance these plans.
Impact on Seagate and Western Digital: No Panic in the Short Term, Pressure in the Medium Term
Goldman Sachs points out that even assuming a moderate probability of success for Toshiba's expansion, the bank expects that the industry pricing and margin landscape for Seagate and Western Digital will remain relatively stable in the short term. In addition, Goldman Sachs believes that these two companies (especially Seagate) are leading in the HAMR (Heat-Assisted Magnetic Recording) technology roadmap, which helps them maintain higher margins. But in the medium term, Toshiba's expansion could limit the upside potential for both companies' margins. More critically, it could suppress their valuation multiples — currently Seagate and Western Digital trade at forward P/E ratios of 18-20x, while the memory chip sector trades at only 4-8x.
Upstream Supply Chain Set to Benefit
Goldman Sachs believes that Toshiba's expansion is a positive factor for the HDD component and materials supply chain. Unlike HDD manufacturers, the upstream supply chain (mainly Japanese companies) has largely not implemented aggressive price increase strategies. Over the past year or two, their main gains have come from product mix improvement driven by the rising share of nearline HDDs, as well as capacity utilization profit improvement from sales volume growth. Therefore, Goldman Sachs does not believe that Toshiba's potential production increase will raise concerns about intensified supplier competition or market share changes; on the contrary, Goldman Sachs believes that positive factors such as a rising share of high-tech-difficulty products and industry-wide sales volume growth will drive earnings expectations higher. Goldman Sachs also consulted industry research firm TSR. TSR noted that HDD capacity share is determined by both shipment volume and per-drive capacity, and Toshiba's shipment volume share is on an upward trend. This investment is speculated to address delays in the transition to larger capacities, and may target the MG13 series and subsequent products. On the other hand, launching large-capacity model production lines in the short term is not easy, and the barriers to achieving technology roadmap, capacity, and capacity share targets are not low.
HDD-related component companies include: (1) TDK, which is the main magnetic head supplier to Toshiba but has also begun shipping to Seagate/Western Digital, and is also a major supplier of HDD suspensions; (2) Minebea Mitsumi, which has an overwhelming share in the pivot area and supplies 100% of Seagate's HDD spindle motors; (3) Nidec, which supplies 100% of Western Digital/Toshiba's HDD spindle motors; (4) Nitto Denko, which has an overwhelming share in high-function circuit materials.
HDD-related materials companies include: (1) HOYA, a glass substrate supplier; (2) Resonac, which sells HDD media to Toshiba/Western Digital/Seagate.
Investment Bank Ratings and Target Prices
On individual stocks, Goldman Sachs gave Seagate a "Buy" rating with a target price of $960; and gave Western Digital a "Neutral" rating with a target price of $615. For Japanese suppliers, Goldman Sachs gave "Buy" ratings to TDK, HOYA, and Resonac, with target prices of 4,900 yen, 36,000 yen, and 25,060 yen, respectively.
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