Wall Street's consensus has once again fallen significantly behind actual market conditions. According to the latest channel checks by Morgan Stanley, demand and pricing in the hard disk drive (HDD) market are experiencing unprecedented strength, with supply shortages expected to persist until the 2028 calendar year.
Based on these findings, Morgan Stanley has reaffirmed its Overweight ratings on Seagate Technology PLC and Western Digital, while elevating Seagate to "Top Pick" status, replacing Western Digital. The firm has raised its price target for Seagate from $468 to $582, with a bull case scenario of $796, and increased Western Digital's target from $369 to $380, with a bull case of $519.
The market is currently severely underestimating the leverage these two HDD leaders hold in AI and cloud data center spending. Morgan Stanley notes that both stocks are trading at just 13-14 times their projected 2027 calendar year earnings per share, while the firm's own EPS estimates for 2027/28 are 25%-50% above the Street consensus. Gross margin expectations are also 400-500 basis points higher than consensus, potentially reaching up to 700 basis points. With the accelerated cost reduction of high-capacity technologies like HAMR and stronger-than-expected pricing power, Seagate and Western Digital are entering a golden window for gross margins to reach the mid-to-high 50% range. Tactically, due to Seagate's current valuation discount and faster gross margin expansion, Morgan Stanley recommends investors shift their preference to Seagate.
A "Stronger for Longer" HDD Cycle: Supply-Demand Imbalance to Extend to 2029 Morgan Stanley's "Stronger for Longer" thesis is not only intact but strengthening. Research indicates that despite low-to-mid single-digit percentage growth in HDD unit production, the industry will still face a shortage of 200 exabytes in 2026, representing 10% of the market, and nearly 250 exabytes in 2027.
This robust demand is driven by the ongoing shift of workloads to the cloud and the widespread adoption of AI, which is accelerating data generation. Currently, HDDs store approximately 80% of global cloud data. Under conservative assumptions—30% annual growth in cloud exabyte demand, a 2 percentage point annual market share gain by eSSDs, and HDD suppliers refraining from adding new greenfield capacity—Morgan Stanley projects that HDD supply and demand will not reach equilibrium until the 2029 calendar year, 12 months later than previously expected.
Dual Drivers: Pricing Power and Cost Reduction to Boost Margins Beyond Expectations A key disruptive finding in Morgan Stanley's model is that HDD suppliers are negotiating procurement orders with major hyperscale cloud customers for 2027/2028 at prices approaching $20 per terabyte. This is more than 30% above the firm's current base-case assumption of $13-$15 per terabyte and nearly 20% higher than its bull-case pricing scenario.
On the cost side, as both suppliers transition to 40TB+ high-capacity drives in the second half of 2026, cost per exabyte is expected to decline rapidly over the next six quarters. This widening gap between price per gigabyte and cost will drive Seagate and Western Digital's gross margins into the mid-to-high 50% range by early 2027. Morgan Stanley's latest gross margin forecasts are 400-500 basis points above the Street consensus through 2027.
Tactical Portfolio Shift: Why Seagate Replaces Western Digital as Top Pick Although Morgan Stanley remains highly optimistic about Western Digital, it has shifted its near-term relative preference and "Top Pick" designation to Seagate for four core reasons:
Catalyst Realization: Key catalysts previously supporting Western Digital—narrowing the valuation gap with Seagate and leveraging SNDK shares for deleveraging—were realized last quarter. Valuation Discount: Seagate currently trades at a price-to-earnings ratio more than one turn lower than Western Digital, yet Morgan Stanley believes both should trade at similar valuations. Faster Gross Margin Expansion: Bottom-up cost-per-terabyte analysis indicates Seagate's gross margin expansion should slightly outpace Western Digital's by approximately 50 basis points over the next 12 months, thanks to a strong HAMR product portfolio transition. Greater EPS and Price Target Upside: Morgan Stanley sees higher relative upside in its 12-month EPS estimates and price target for Seagate. Additionally, Seagate is expected to repay its convertible debt earlier, reducing equity dilution.
Deeply Undervalued Core Assets in AI Data Centers Morgan Stanley views this as an extended cycle, with the peak not occurring in 2027, and maintains a base-case target price-to-earnings multiple of 18 times for both Seagate and Western Digital. Within the Russell 3000 index, only about 20 companies with market capitalizations over $5 billion are projected to achieve over 40% EPS growth and gross margins above 45% by 2028—Seagate and Western Digital are among them. Further filtering for companies with free cash flow margins exceeding 30% and returning over 75% of FCF to shareholders leaves only Seagate and Western Digital.
Compared to the memory market, the HDD market structure is superior: only three major players exist, with the top two controlling 90% of the market. There are no Chinese competitors, data center revenue exposure exceeds 80%, and no new greenfield capacity is being added. Total capital expenditure for Seagate and Western Digital in 2026 is estimated at approximately $1 billion, significantly lower than the over $90 billion spent by the top five global memory players.
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