Pressure grows in fierce market

It's important to realize just how much the industry has evolved in the past seven years. The industry's extremely competitive nature is forcing more companies with small market shares to drop out of the business.

It's important to realize just how much the industry has evolved in the past seven years. The industry's extremely competitive nature is forcing more companies with small market shares to drop out of the business. At the start of the 1990s, 59 companies manufactured rigid disk drives, but in 1997, there are only 22 active manufacturers, a reduction of four from the previous year.

Not only has that eliminated the specialized niche markets that allowed smaller players to make a decent living, but it's also intensified the competition among a cluster of multibillion-dollar firms that are willing to forego fat profit margins for the sake of market share.

"The pricing pressure in the desktop market has really hurts these stocks," said Glenn Hanus, an analyst at Needham & Co. "Fujitsu has been especially aggressive, lowering prices in their distribution channels by 10 to 15 percent in the past three months."

Others, including Western Digital and Seagate, have been forced to follow suit at a cost.

"I'm not sure what Fujitsu's game plan is because they certainly can't be making any money at these prices," Hanus said. "But they are gaining market share and that scares companies that for a while seemed to take their margins for granted."

A closer examination of major disk-drive stocks shows a startling price decline.

Seagate, which at one time owned about 75 percent of the server drive market, hit its 52-week high in May at $54.25 per share. But almost overnight, the stock plunged to $33 per share by late June and has subsequently slid to Monday's close of $24.06 -- its lowest price in more than two years.

Western Digital's story is almost identical. After bouncing between $20 to $25 per share in the first half of the year before peaking at $54 per share in late August, its stock went into a free fall. It's been practically a straight line down to Monday's closing price of $21.63, off $2 per share.

Quantum Corp. hit its 52-week peak of $42.44 per share in September. On Monday, it closed down $1.94 to $28.75 per share. Komag Inc. was trading at $36 per share in May; now it's going for a paltry $18.88 per share.

On Friday, Hanus' firm downgraded Western Digital's stock from "buy" to "hold" after the company warned that profits would suffer in the fourth quarter.

On Monday, Solomon Bothers lowered its rating on Western Digital shares and Applied Magnetics Corp. to "hold" from "buy." Analyst John Dean said he lowered Western Digital's stock because of concerns about its position and potential challenges as it ramps up its magneto-resistive product lines. Besides Western Digital's $2 drop on Monday to $21.63, Applied Magnetics lost $3.75 per share to $17.63.

"There's a lot of people looking over their shoulders right now," Hanus said. "This industry's going to go through a period of adjustment for at least the next couple quarters. Until things improve, these stocks are going to remain stagnant."

Back to part 1.