Seagate Technology PLC (STX), Western Digital Corp (WDC): Do Hard Drives Belong in Your Portfolio?

Modern hard drives have been around since the 1980’s. The hard drive industry as it exists today has three dominant players: Seagate Technology PLC (NASDAQ:STX), Western Digital Corp (NASDAQ:WDC) and Toshiba.

If you live in America, for the past few years you’ve probably noticed the rise of smartphones and tablets. This rise has coincided with a decline in sales of personal computers. Those who are bearish on hard drive makers often cite this trend as a primary reason to stay away from shares of those companies. Hard drive technology is going the way of the dodo bird, so they say. Accordingly, companies whose profits depend on selling hard drives will perform poorly in the stock market.

It isn’t that simple

First of all, there is strong evidence to suggest that the demand for hard drives, while declining, is still nowhere near disappearing completely. While solid state drives have many advantages that hard drives simply can’t replicate, the relative low cost of hard drives ensures that they will still be profitable for years to come. This will at least continue until solid state drives aren’t so darned expensive.

Just look at Seagate Technology PLC (NASDAQ:STX)’s hard drives sales. It took the company 28 years to sell one billion hard drives, a feat which it accomplished in 2008. Reaching 2 billion hard drives only took the company an additional five years. A sales increase of that magnitude leads me to believe that hard drives are not close to becoming extinct.

Hard drive makers are priced at extinction rates

With the exception of Toshiba, all of the hard drive makers sport incredibly low price-to-earnings ratios right now. One possible reason that Toshiba’s shares aren’t as cheap is that the company is nowhere near as dependent on revenues from hard drives as Western Digital Corp (NASDAQ:WDC) and Seagate Technology PLC (NASDAQ:STX) are.

Western Digital Corp (NASDAQ:WDC) sports a price-to-earnings ratio of 8.72 and its dividend yield currently stands at 1.4%. The company is a relative newcomer when it comes to distributing dividends to shareholders.

Seagate Technology PLC (NASDAQ:STX)’s price-to-earnings ratio of 7.58 is also very low. Seagate Technology PLC (NASDAQ:STX) has a strong record of paying dividends to shareholders; right now, the company’s shares yield 3.2%. In May the company was named the top dividend stock of the Nasdaq 100.

Two out of these three companies, Western Digital Corp (NASDAQ:WDC) and Seagate Technology PLC (NASDAQ:STX), are priced as if demand for hard drives is going to dry up in the near future. That is incredibly unlikely, but even if hard drives eventually do become obsolete that is no reason for investors to panic.

It’s not like these companies are sclerotic

Great companies usually notice when changes are occurring in the area in which they operate. Sometimes a company’s management will accurately surmise that a failure to adapt will lead to their doom. Accordingly, all three of these companies are innovating to stave off becoming obsolete.