This is a repost of a post from Capitalstool.com by Sandy Beach.
I know most of the members of this board are active technical traders and not exactly followers of fundamentals and long term value investing. I tend to trade based on technicals as well. But I have to concede even I am shocked at how little fundamentals have played a role in recent days in the stock prices of the tech industry.
If you haven’t been paying attention there is massive flooding in Thailand, a major manufacturing hub for the high tech industry. Factories have been completely destroyed with no possibility of rescue. In other words we’re looking at a situation where they will need to start over from scratch, break ground at new locations and buy all new equipment. Western Digital (WDC)’s factories have been completely destroyed in Thailand taking out between 60 – 70% of its global capacity. They now claim that it will take them six to nine months to recover production. That means April or maybe July of next year!!!
What’s worse is small component manufactures also got wiped out. Nidec for example makes motors that spin the platters for nearly all the disks made. If I remember it’s like 90% of all disks use their motors. Well they got completely wiped out in Thailand too. But luckily they have some production in China so we’ll have to see how they can deal with this. But obviously even Seagate will be affected by Nidec.
The only good thing is that few people were injured from what I am reading (at least so far). Thank God!
You may recall that I own a tech business in Silicon Valley. Let me give you an insider’s view. From a pure volume perspective globally the small SATA drives are the big sellers. Large OEMs still load up the boat with smaller 160GB, 250GB and 500GB SATA drives – that’s the bulk of the market. When the news hit this week the panic struck and resellers, OEM’s and system integrators started flooding the hard drive vendors with purchase orders far in excess of supply. One sale person I work with said her wrists were badly hurting on Wednesday from the endless stream of orders passing over her desk. Well the 1TB and smaller drives all sold out immediately – right off the bat. When resellers, OEMs and system integrators found out the 160’s were gone they bought out the 250’s and when the found the 250’s were gone they bout out the 320’s and so forth all the way up the line to the 3TB’s. So everything below a certain size just sold out.
Think of it as “substitution” like the chained-CPI, if beef supply runs low and gets too expensive people buy chicken, when chicken runs out they by hot dogs and so on down the line… to beans and rice. The same thing happened here. So as the small drives ran out customers bought out the next size up until those sold out right up the line. So even though the big mess was with WD and mostly impacting smaller drives because of substitution all drives sold out. The market for 2TB and 3TB drives is tiny in comparison so it didn’t take long to sell just about everything in a day.
So all distributors for WD/Hitachi and Seagate reacted and put limits per reseller. Some drives it’s only one drive per reseller, some it’s five, some it’s 100. They also removed all discounts. The normal single drive price you are used to seeing includes a major discount in it. Well those discounts are now gone. Not only that but they are jacking up the prices to take advantage of the situation. They have announced major price hikes every day and sometimes multiple times in one day. But even doing that they couldn’t stem the tide fast enough and warehouses emptied out.
Now these guys aren’t dumb. They’ll do what they can to take advantage of this. Seagate will try to ramp up and take market share. They will raise prices, etc. There will be no volume discounts. So there will be a response. I have no crystal ball as to how long it will take. However, without drives desktops, servers and storage can’t be built. Intel can’t sell CPUs, SuperMicro can’t sell motherboards, ATI can’t sell video cards, etc. Dell, HP, IBM can’t sell systems. Companies that rely on rapid growth in I.T. infrastructure may be grounded. What do you do if you are Facebook and you need a thousand servers ASAP? So as you can imagine there is panic everywhere. (It won’t be bad for everyone – SSDs manufacturers may do very well indeed).
I don’t know if you recall but there was a massive resin factory fire back in 1993 in Japan where all the resin for RAM modules was produced. I was in business back then. Prices spiked through the roof on RAM modules and then launched past the roof, the moon and finally out of the known solar system. It sparked a global panic as RAM modules sold out and the computer market crashed. It took almost a year to recover. This reminds me exactly of those days. It’s utter panic in Silicon Valley right now. There’s lots of talk of a recession in Silicon Valley due to the hard drive stock depletion. Expectations are system component sales will plummet. Everyone is talking about possible coming headcount reductions. All this in just 72 hours or so…
What I don’t understand with all this going on is why WD’s stock seems to be blissfully floating along like nothing has happened. You would think it would crater. And there are a lot of other large OEM stocks that you would expect to see really hitting the fan about now. Yet all we seem to get is 100% risk on / risk off trades mixed in with bot polo and reaction to the EU news noise.