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Storage sector slumps

A pre-announcement from storage maker Western Digital has pulled down the entire storage sector, and the slump most likely will continue into the spring quarter.

Pricing pressure and a pre-announcement from storage maker Western Digital (WDC) has pulled down the entire storage sector today, and the slump most likely will continue into the spring quarter.

WDC fell over 20 percent in trading today, dropping as much as 7-1/4 points to hit 23, before ending the day at 23-5/8, down from yesterday's close of 30-1/4. The stock topped the most actively traded list on the New York Stock Exchange, with 9.39 million shares trading hands.

Other storage companies also lost ground in heavy trading.

Quantum (QNTM) lost about 15 percent, to end the day at 30-3/16, from yesterday's close of 35-9/16. It was the fourth most actively traded stock on the Nasdaq, with volume reaching nearly 9 million shares.

Seagate (SEG) dropped about 6 percent, Iomega (IOM) and Syquest (SYQT) lost about 3 percent, and Read-Rite (RDRT) dropped about 15 percent, down 5-3/8 from yesterday's close of 35-9/16.

WDC said this morning that its second-quarter results would be negatively impacted by competitive pricing pressures in the desktop hard-drive business, as well as by product-mix and cost issues associated with the company's last rollout of desktop drives.

Smith Barney and Bear Stearns cut Western Digital to "neutral" from "buy," following the company's announcement today.

Analysts say Western Digital is not the only storage maker feeling the heat from the increasing pressure new players, such as Fujitsu and IBM, have brought to the storage market.

One analyst said there were pricing pressures in the high-end SCSI drives about six months back, and that pressure has dripped down into the desktop market as well. He stressed, however, that this is not a demand issue, but rather the result of oversupply.

"The demand is awesome, but despite that, too much supply is hurting profitability," the analyst said.

He added that much of the back-up will get corrected in December because, seasonally, it is a strong quarter. Additionally, the seasonal up-tick is expected to be followed by another strong March quarter. "This should be cleared entirely or to a great extent by March because the OEM business is still very robust," the analyst said.

Some companies have cut back production slightly to ease the congestion in the channels--there is about six weeks of back-up there now, the analyst said.

However, the analyst pointed out, once things become less congested by the end of the March quarter, another seasonally slow period is expected to begin.