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Storage-maker stocks tumble

Shares of computer storage-maker stocks fell like dominos, reflecting the fact that the industry is grappling with excess inventory.

Shares of computer storage-maker stocks fell like dominos today after Western Digital (WDC) said its earnings will come in short of estimates, reflecting the fact that the industry is grappling with excess inventory.

Read-Rite (RDRT) was hit the hardest, with its shares tumbling as much as 11.4 percent in morning trading before regaining some ground to close at 24-1/2, down 2-5/16 over yesterday.

Analysts estimates for coming quarter
Company Estimate
per share
Fiscal
quarter
Report
date
Applied Magnetics
(APM)
84 cents Q4 Oct. 20
Read-Rite
(RDRT)
67 cents Q4 Oct. 21
Quantum
(QNTM)
60 cents Q2 Oct. 21
Seagate
(SEG)
39 cents Q1 Oct. 14
Western Digital
(WDC)
81 cents Q1 Oct. 9
Source: First Call

And storage-maker giant Quantum (QNTM) saw its shares fall as much as 10.5 percent in morning trading before ending the day at 38-3/8, down 4-1/8 from yesterday.

Applied Magnetics (APM) and Seagate (SEG) also were down in trading today, and Western Digital's shares fell by as much as 3 percent in morning trading before ending the day at 40, down 1 over yesterday.

"What Western Digital?s news says is that no company is insulated from pricing pressures for the quarter," said David Takata, an analyst with Gruntal.

Western Digital yesterday said its Related story: Western Digital releases earnings first-quarter profits likely would come in at about 20 percent below analysts' estimates due to steep pricing cuts in its hard-drive business. The company's pricing cuts followed similar cuts by competitor Seagate that were aimed at moving excess inventory in the distribution channel.

"All the disk drive-makers have tried to say they are no longer in a commodity business. They say the barriers to entry are high and that 80 percent of the business is controlled by the top four companies," Takata said. "But if one drops prices and there is over capacity, then the others have to follow."

And despite talk that business for these storage-makers will suddenly pick up once the excess inventory is absorbed, Takata remains skeptical that the industry outlook will improve in the near term.

"There is too much capacity out there as inventory was pushed into the channel, and now everyone is waiting for orders from the [original equipment manufacturers] to catch up," he said. "But what people ignore is how they got into this problem in the first place."

The softness in the industry, which emerged last spring and left some storage-makers, like Western Digital and Seagate, having to issue preliminary warnings that they would not meet estimates, may, however, show stabilization in the first quarter this year. Industry players are gearing up to ship more units during the last quarter of the year than they did during the previous quarter or a year ago.

Takata said that, in the long term, excess inventory likely will be absorbed by the first quarter of this year and that PC sales are expected to balance out the channel.