If data is the new oil, as some pundits say, then memory chip and hard-disk drive makers are the critical storage providers.
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The growth of cloud computing, Internet of Things and autonomous vehicles is accelerating. That growth points to continued demand for data storage systems in the years ahead, industry officials and analysts say. Those trends may even be powerful enough to smooth out the historically cyclical nature of the business.
The trends also helped drive IBD's Computer-Data Storage industry group ahead 11.5% in the eight weeks through Thursday. The move marked the best gain among the 197 industry groups tracked by IBD. It also lifted the 12-stock group to a No. 5 ranking among those industries.
Group leaders include Micron Technology (MU) and Western Digital (WDC). Among the other prominent names are Carbonite (CARB), NetApp (NTAP), Pure Storage (PSTG), Seagate Technology (STX) and recent IPO Smart Global Holdings (SGH).
Micron's shares traded on Thursday just below what is almost a 17-year high, driven by robust demand for its DRAM and Nand flash memory chips.
Micron on March 22 posted fiscal second-quarter sales and earnings above Wall Street's expectations. Management also guided results for the current quarter above consensus views.
Trends in cloud-computing data centers, smartphones, PCs and other devices imply continued strong demand for DRAM and Nand flash memory chips, says Micron Chief Executive Sanjay Mehrotra.
"We're excited about the opportunities ahead for our business," he told IBD. Mehrotra also noted that memory requirements for computers and devices are increasing across the board.
Data Center On Wheels
Dynamic random access memory chips are suited to settings requiring high capacity at relatively low cost. The market for such DRAM chips is tight. The supply constraint owes mainly to growth in data centers. Data centers are expanding largely as a result of more computing workloads shifting to the internet cloud. The proliferation of machine learning and artificial intelligence applications is also driving greater demand for DRAM chips for data centers.
One other avenue of DRAM demand: smartphones. That is due to demanding applications such as augmented reality, virtual reality, AI and 4K high-dynamic-range video, Mehrotra said.
In addition, smartphones also have a greater appetite for Nand flash storage, thanks largely to the rise of 4K HDR video and dual-camera systems, he said.
And those aren't the only fast-growing markets for data storage chips.
"Automotive is expected to be one of the highest growth areas for DRAM and flash," Mehrotra said.
More advanced autonomous driving vehicles (level 4 and 5) will have as much as 40 gigabytes of DRAM per car, and possibly a terabyte of flash storage, he said.
"So when you look at all the compute-intensive aspects of autonomous vehicles in the future," Mehrotra said, "it will be like a data center on wheels."
Data-storage providers are key beneficiaries of the shift to the emerging data-centered computing cycle, investment bank Morgan Stanley said in an April 9 report.
Prevailing trends include more advanced semiconductor technologies, more pervasive and faster networks, and significant cloud-based data center expansion. These combine to enable "a new wave of data technologies," Morgan Stanley analysts said.
Those data technologies, such as artificial intelligence and automation, promise to speed productivity growth for the first time in 20 years, they said.
Clawing Into AI Data Markets
Morgan Stanley sees a "massive unfulfilled market opportunity" for memory technologies. It estimates there will be close to 500 hyper-scale cloud data centers globally by 2020, up from 259 last year. Cisco Systems (CSCO) estimates that data traffic will triple to 15 zettabytes from 5 zettabytes in 2015.
DRAM is an important resource in AI and autonomous driving. The chips hold data in temporary storage close to the processor, which allows for fast response times.
Hard-disk drives and flash drives provide longer-term storage. Mechanical hard-disk drives have a cost advantage over solid-state drives using Nand flash. But flash storage sales are eating into traditional hard-disk drive markets.
Western Digital and Seagate are top makers of hard-disk drives. Western Digital also makes flash memory chips through its SanDisk division. Micron sticks to making memory chips.
Pure Storage is developing flash storage arrays specifically for AI applications. It has partnered with graphics-chip maker Nvidia (NVDA) on a system that closes the performance gap between computing and storage to speed machine learning. The system, announced March 27, is called AIRI, short for AI-Ready Infrastructure.
"An AI solution without the right storage is like a fiddler crab with one giant claw — it can only get around as fast as that one, giant claw," Moor Insights & Strategy analyst Patrick Moorhead said in a blog post.
AIRI aims to get data storage up to speed with Nvidia's graphics processing unit, he said.
Micron Follows Nvidia's Lead
Lately, Wall Street analysts have been debating whether the current up-cycle in memory chips has started to wane.
Sentiment regarding memory chips "remains quite negative amidst concerns of rapid pricing declines and the potential for oversupply with new DRAM and Nand capacity coming online," wrote Evercore ISI analyst C.J. Muse, in an April 9 report.
Samsung, SK Hynix and Micron are among the major players set to bring on additional production capacity.
"We continue to believe that pricing will remain stable in DRAM through the year," Muse said. "Nand price declines will be more than offset by cost reductions, driving higher gross margins."
Other analysts contend that concerns about a possible DRAM oversupply are overblown.
Susquehanna Financial Group analyst Mehdi Hosseini said in an April 10 report that, even if enterprise/cloud demand were to weaken this year, "some of the wafer capacity plans will be put on hold to avoid massive average selling price/gross margin erosion."
Meanwhile, some chipmakers are moving from commodity products to specialized systems.
Micron is "transitioning from a component supplier to a system solution" vendor, Needham analyst Rajvindra Gill said in an April 2 report.
"We see similar parallels to Nvidia's transformation from a component supplier to a platform company," Gill said. That transformation resulted in a higher multiple for Nvidia stock.
"Micron has begun the process (of transitioning) from solely selling bits to selling full system SSD (solid-state-drive) solutions," he said.
That sort of strategic shift jibes with the industry's overarching trend toward memory becoming "a strategic differentiator in high performance computing applications," according to Gill. One result has been not only "the highest gross margins in the company's recorded history, but smoother (less volatile) earnings cycles."
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