What’s in store for computer storage & peripheral stocks?

There’s no other way to say it – and we know we’ll sound like Paris Hilton in making this statement – but computer storage & peripheral stocks are so hot. There, we said it. It’s true, though. In 2004, this sub-sector easily outpaced broader markets. And so far, it looks like 2005 will be a repeat performance – or, should we say, outperformance.

In light of the group’s relatively strong momentum, it may be time to ask yourself: Should investors upgrade their portfolios with computer storage & peripheral stocks? Many industry analysts would probably argue that the timing could not be better this year to enter the technology sector through the computer storage & peripherals sub-industry. Why the positive sentiment? It’s due, of course, to an encouraging outlook for this group, based on these short-term fundamentals:

• Greater emphasis on data backup and replication requirements (making storage a high spending priority in 2005)
• Improved capital structures for storage and peripheral companies (given their healthy cash reserves and ongoing free cash flow generation)
• Growing external disk storage system market (this market also saw 4.7% growth in 2004)
• Renewed interest in color and digital printer product lines (in the face of a reviving global economy)

There are also favourable long-term trends that could make the computer storage & peripherals sub-sector a truly long-legged growth space:

• Possibility of ever-increasing unit shipments of higher capacity drives
• Likelihood of decreasing manufacturing costs over time
• Expectations of higher sales of wider-margin software products (which now represent over 20% of current revenue)
• Growth in the tape-drive storage market (based on its relatively lower cost and improving product functionality)
• Prospect of greater demand for storage capacity (due to the expansion of consumer electronic devices, e-mail and the Internet)
• Sales of hard and CD/DVD-ROM optical disk drives (which come automatically installed into new PCs)

The only "fly in the ointment" here is the possible underperformance of a key component in the group – the printer device market. Many analysts believe that this segment could be negatively impacted by these fundamentals in the foreseeable future:

• Declining market for traditional impact printers
• Rank as a low IT spending priority (which would reduce demand for the product)
• Prospect of intensifying pricing pressures (due to lower demand for printers) and therefore lower profit growth

Some of the stocks that fall into this group include the following: Alcatel Canada, ATI Technologies, Celestica, Com Dev, Coretec, EMC, Emulex, Mosaid Technologies, QLogic, Research In Motion, Seagate Technology, Storage Technology and Western Digital.

June 2005

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.