Why small solid-state drives may become big (Jun 04, 2009)
Tara Hedlund, CFA, CPA
Christopher McHugh
Robert Turner, CFA
Michael Lozano
Daniel Hirsch


If the technology sector were a pond, the water that solid-state drives occupy in it would amount to just a few gallons.

The market for solid-state drives is tiny in relative terms, with sales of a mere $586 million last year, according to Gartner, a technology-research firm. In 2008, 4.3 million low-end solid state drives and 570,000 mid-range solid-state drives were purchased. In comparison, their primary product competitors, hard drives, displace a lot more water in the tech pond: last year, 231.7 million low-end hard drives and 274.8 million mid-range hard drives were bought. Or to put it another way, low-end and mid-range hard drives combined outsold their solid-state counterparts by a factor of 110.

But we think that over time the sales gap may narrow and solid-state drives may take up a much bigger part of the pond. In our estimation, demand for solid-state drives -- components that contain flash-memory chips, have no moving parts, and are used in hardware such as laptops, digital cameras, MP3 music players, computer servers, and data-storage devices -- could reach substantial volumes by 2011 or 2012. In fact, we think solid-state drives could be as prominent and critical a technology for diverse hardware applications as 3G technology is for handset applications today.

To us, solid-state drives hold commercial promise because they offer these technical advantages over hard drives:

Smaller is better

* They are smaller and weigh less, allowing the hardware in which they are installed to be smaller and lighter.

* They are more durable -- more tolerant of varying temperatures, humidity levels, bumps, and vibrations.

* They permit faster access to data (in laptops containing solid-state drives, for instance, Windows can be booted in a matter of seconds).

* They consume 80-90% less power on average. Hard drives eat up more power partly because their disks or platters spin up to 7,200 evolutions per minute in processing digital byes of data, while solid-state drives remain motionless in accomplishing the same job.

The principal drawback to solid-state drives is economic: they are more expensive than hard drives. For instance, Apple’s MacBook Air laptop with a 120-gigabyte hard drive retails for about $1,800, but the price rises to about $2,500 for the same model with a 128-gigabyte solid-state drive. However, that kind of price premium is shrinking. If the price of solid-state drives continues to decline, as we think is probable, a virtuous circle may materialize: demand would increase, which would drive the price down still lower, stimulating even more demand in turn.

Prices falling

Gartner calculates that the average selling price of all grades of solid-state drives should fall about 22% annually between 2007 to 2012, from $231 to $69. And in terms of the costs of computing, solid-state drives’ operating expenses per gigabyte were more than $1,000 in the 1990s and have been declining steadily ever since. Their operating expenses per gigabyte may fall to less than $25 by 2011, in Gartner’s estimation. As their prices and costs decrease, the market for solid-state drives could grow threefold over the next three years, with revenue of about $6 billion in 2012, in our analysis.

There are three broad categories of solid-state drives, each with its own set of applications: 1) low-end solid-state drives, used in netbooks, which are small portable computers -- and the fastest growing tech product today; 2) mid-range solid-state drives, used in personal computers and laptops; and 3) high-end solid-state drives, used in corporate servers and data-storage devices for their superior speed and performance. Currently the chief application for solid-state drives is laptops, but we think new low-end and high-end applications should emerge. (We think the high-end applications, involving things such as computer servers, Web servers, search engines, and storage devices, should prove the most profitable.)

For example, up to now hard drives have been the component of choice for storing "Tier One" data -- the data on digital systems that are the most important, are the most expensive to store, and can be retrieved fastest. But we think solid-state drives can supplant hard drives in Tier 1 applications. Solid-state drives use NAND, a type of flash memory that provides increasing amounts of storage capacity as well as what Gartner characterizes as "orders-of-magnitude enhancements of speed and efficiency in storage structures that require less space and power." As such, Gartner forecasts that demand for high-end solid-state drives should grow by 1,612% from 2007 to 2012, from 473,000 units to 8.1 million, mainly for storage and server uses.

Netbooks: a key catalyst

 

At the low end of the spectrum, we think demand for solid-state drives could soar like the space shuttle Atlantis as a result of the popularity of netbooks. Netbooks have been called the compact car of computing: they are small in size (typically 10 inches or less), lightweight (typically less than three pounds), energy efficient, and affordable (typically under $500). Netbooks have been dismissed by some tech pundits as the fad du jour of the industry, but we think they’re here to stay.

In the vast territory of contemporary computing, netbooks occupy the middle ground between pocket-sized devices like Apple’s iPhone with a 3.5-inch diagonal screen and full-size laptops and desktop computers with screens that are more than 12 inches wide. We think sales of netbooks could double this year, accounting for nearly 10% of all personal computers sold. We favor the more bullish forecasts about their growth, such as the estimate by ABI Research that 139 million netbooks will be bought in 2013, up from 35 million this year. We hasten to add that 35 million units by itself represents extraordinary growth, since netbooks were only introduced in late 2007.

We think netbooks make sense for adults who want access to online services via a cheap, portable, lightweight device and for children who are clamoring for their first computer. And netbooks meet a need of many business people and gadget-a-holics, especially young people, who covet all the mobile connectivity they can get. For instance, Freescale Semiconductor, a chip maker spun off from Motorola, gave netbooks to a focus group of 14- to 20-year-olds who already own smart phones and computers. The members of the group generally responded enthusiastically to the netbooks, and contrary to Freescale’s expectations, the netbooks diverted them not a whit from using their smart phones and computers as much as before. (The group reportedly spends an average of five hours a day online -- a duration that may seem almost moderate to exasperated parents of some teenage gadget-a-holics.) And even for those demographic segments of the populace who are less addicted to the Internet, netbooks have appeal, in our judgment. We believe a large minority of consumers could accomplish all of their computing tasks on netbooks.

Samsung: the leader

 

Whether for netbooks or other applications, the market for solid-state drives is led by Samsung Electronics (market capitalization: about $63 billion) of Seoul, Korea, with a share that we estimate to be more than 30%. STEC (market capitalization: about $740 million) of Santa Ana, California, ranks second, with a market share of 16%; SanDisk (market capitalization: about $3.1 billion) of Milpitas, California, is third at 9%; and the world’s largest semiconductor company, Intel (market capitalization: about $87 billion) of Santa Clara, California, is fourth at 7%. In our judgment, a fifth company, Micron Technology (market capitalization: about $3.7 billion) of Boise, Idaho, has the ability to become a market leader as well.

We think that Samsung Electronics and Intel are most likely to dominate this market as time passes. Both are financially strong and have the means to continue developing solid-state technologies (and other technologies) that deliver ever more computing power at ever lower cost. In our judgment, STEC, the smallest company of the five, faces perhaps the most daunting long-term competitive challenge. STEC has been a pioneer in solid-state technology for almost two decades, but it remains to been seen if the company has the scale and the resources to compete with the likes of Intel and Samsung. Historically STEC has channeled about 10% of its annual revenue into research and development. It may be compelled to spend more than that going forward to keep up.

Altogether, about 40 companies now make solid-state drives. As the industry matures and as the Darwinian process of survival of the fittest prevails as it always does in the technology sector, their numbers are bound to decrease sharply. At any rate, we like to think of them, whatever their individual merits, as swimmers in a good section of the tech pond, a section that’s likely to get much bigger in the years ahead.

 

 

 

 

 

The views expressed represent the opinions of Turner Investment Partners as of the date indicated and may change. They are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. Opinions about individual securities mentioned may change, and there can be no guarantee that Turner will select and hold any particular security for its client portfolios. Earnings growth may not result in an increase in share price. Past performance is no guarantee of future results.

Turner Investment Partners, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm that manages more than $14 billion in stocks in separately managed accounts and mutual funds for institutions and individuals, as of March 31, 2009.

As of May 31, 2009, Turner held in client accounts 2.1 million shares of Apple, 180 shares of Samsung Electronics, 310,268 shares of SanDisk, 1,470 shares of Intel, and 13.4 million shares of Micron Technology. Turner held no shares of STEC.

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