THE TD COWEN INSIGHT
In this report, we discuss storage industry dynamics while focusing on heat-assisted magnetic recording (HAMR) and cloud service providers’ decision-making process in choosing their HDD/SSD mix.
HAMR HDDs represent a significant technological advancement that will allow hard disk drives (HDDs) to compete against Enterprise solid-state drives (SSDs) in the data center. Today, HDDs and SSDs collectively represent ~12% of data center capex with 85% of data stored on HDDs. Longer term, we see 80% of data center storage remaining on HDDs, down from 85% today.
HAMR – THE NEXT MONUMENTAL SHIFT IN THE HDD INDUSTRY
Over the past two decades, three monumental shifts have taken place in the HDD industry:
- The transition to Perpendicular Magnetic Recording (PMR) HDDs starting in 2005
- The consolidation of the number of suppliers from seven to only three
- The rise of data center storage, which corresponded to 65% of HDD 2022 industry revenues, up from 25% in 2017
We argue that the industry is at the heels of another technological shift — the rise of HAMR.
HDD TO CONTINUE TO DOMINATE DATA CENTER STORAGE MARKET SHARE
Investors fear that SSDs will erode HDD’s market share because of the fast decline in SSD prices, better performance, and lower power consumption. However, we believe HAMR will allow HDDs to remain multiple times cheaper than enterprise SSDs. Here, we make a case for why HDDs will continue to dominate data center storage.
As the demand for data increases to feed AI models and improve their effectiveness, and as cloud service providers (CSPs) focus on cost optimization to drive their AI investments, we argue that HDDs will benefit from AI trends given their meaningful cost advantage.
HAMR & HDD FRAMEWORK
Our initial framework suggests that HAMR drives can be up to 500bps accretive to HDD OEM’s gross margin. HAMR manufacturing yields need to be at least 40% (versus 85% for CMR hard drives today) for the platform to be margin neutral.
Furthermore, our framework suggests that cost per terabyte for HDDs will be ~4x cheaper than SSDs (~2x cheaper when including power, space, and performance) by the end of the decade. Bigger picture, we see nearline HDDs corresponding to ~80% of data center storage by decade-end (from 86% in 2022) driven by ~18% compounded annual growth in exabyte shipments.
HDD MARKET FORECAST
We forecast a $24B HDD market by 2032, growing at ~3% CAGR from 2022 levels with nearline HDDs growing at 7%. We note that the total HDD market declined at a mid-single digits CAGR between 2017 and 2022.
Upside to our estimates includes higher than expected future SSD prices, which may take place if investments in SSD capacity get constrained. This reduces the pricing pressure on HDD OEMs. The downsides to our estimates include technological innovation in NAND that will allow cost declines per terabyte to accelerate, similar to the 3D NAND transition in 2016.
KEY CATALYSTS TO WATCH
- Data center cloud CapEx as we estimate ~70% of nearline HDD demand is tied to new data center builds
- Duration of NAND pricing pressures as that slightly increases risk for HDD’s market share loss
- Production ramp of high-capacity SSDs (30TB plus)
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