Consensus significantly lags behind reality! Morgan Stanley: The dual dominance of mechanical hard drives is underestimated, with supply shortages potentially continuing until 2029. Gross profit margins are expected to enter the mid-to-high 50% range.

The Street’s consensus is once again significantly lagging behind reality.

According to the Chasewind Trading Desk, the latest channel research by Morgan Stanley shows that demand and pricing in the hard disk drive (HDD) market are undergoing unprecedented strengthening, and supply shortages are expected to persist through calendar year 2028 (CY28).

Based on this, Morgan Stanley reiterates its Overweight ratings on Seagate (STX) and Western Digital (WDC), and upgrades Seagate to “Top Pick” in place of Western Digital. Morgan Stanley raises Seagate’s target price from $468 to $582 (bull-case scenario to $796), and raises Western Digital’s target price from $369 to $380 (bull-case scenario to $519).

The market is currently severely underestimating the leverage effect of the HDD duopoly on AI and cloud data center spending. Morgan Stanley notes that the trading prices of these two stocks are currently only 13-14x the expected earnings per share (EPS) for calendar year 2027 (CY27), while Morgan Stanley’s CY27/28 EPS expectations are 25%-50% higher than the Street’s consensus. The expected gross margin is 400-500 basis points higher than consensus (up to 700 basis points). As the acceleration of cost reductions from high-capacity technologies such as HAMR, along with pricing power far exceeding expectations, Seagate and Western Digital are entering the golden window for gross margins to move into the mid-to-high 50% range. Tactically, because Seagate currently has a valuation discount and its gross margin expansion is faster, Morgan Stanley recommends investors switch the Top Pick to Seagate.

“A stronger, longer” HDD cycle: supply-demand imbalance will persist through 2029

Morgan Stanley’s “Stronger for Longer” logic has not only not changed, it is being reinforced. Research shows that although unit shipments in the HDD industry will see an upside surprise growth in the low-to-mid single digits (LSD-MSD%), the HDD byte (EB) shortage will still reach 200EB in CY26 (10% of the market), and will be close to 250EB in CY27.

This strong demand is driven by the continued shift of cloud workloads and the widespread adoption of AI (accelerating data generation).

Currently, HDDs still store about 80% of global cloud data. Under conservative assumptions (cloud EB demand grows 30% year over year, eSSD takes 2 percentage points of share per year, and HDD vendors insist on not adding any new greenfield capacity), Morgan Stanley expects HDD supply-demand to reach balance only in calendar year 2029 (CY29), which is 12 months later than previously expected.

Pricing power and cost reduction working in tandem: gross margin will far exceed Wall Street expectations

This is the most disruptive finding in Morgan Stanley’s model: HDD suppliers are negotiating with major hyperscale cloud customers for purchase orders for 2027/2028, with pricing nearing $20/TB (or $0.02/GB). This price is more than 30% higher than Morgan Stanley’s current baseline assumption of $13-15/TB, and nearly 20% higher than its bull-case pricing assumption.

On the cost side, as the two suppliers begin shifting to 40TB+ high-capacity drives starting C2H26, the cost per EB is expected to accelerate downward over the next roughly six quarters. This “continually widening gap between the price per GB and cost” will drive Seagate and Western Digital’s gross margin to reach the mid-to-high 50% range as they enter CY27. Morgan Stanley’s latest gross margin forecast is 400-500 basis points higher than the Street’s consensus before CY27.

Tactical repositioning: why switch the Top Pick from Western Digital to Seagate?

Even though Morgan Stanley remains extremely bullish on Western Digital, for the following four core reasons, Morgan Stanley shifts its near-term relative preference and “Top Pick” to Seagate:

2. Catalyst realization: The key catalysts previously favored for Western Digital (narrowing the valuation gap versus Seagate, and using SNDK shares to de-lever) were achieved in the prior quarter.

3. Valuation discount: Seagate’s current P/E ratio is more than 1x lower than Western Digital’s, and Morgan Stanley believes the two companies’ valuations should be at the same level.

4. Faster gross margin expansion: Bottom-up analysis of cost per TB indicates that, benefiting from a strong HAMR product mix transition, Seagate’s gross margin expansion pace over the next 12 months should be slightly faster than Western Digital’s (by about 50 basis points).

5. More upside room for EPS and target price: Morgan Stanley has greater relative upside room for Seagate’s EPS expectations and target price over the next 12 months. In addition, Seagate is expected to repay its convertible bonds earlier, thereby reducing equity dilution.

Core AI data center assets that are severely undervalued

Morgan Stanley believes this is an extended cycle (i.e., 2027 is not the peak), and therefore maintains a 18x forward target P/E multiple for Seagate and Western Digital.

Within the Russell 3000 Index (companies with market caps greater than $5 billion), it is expected that only about 20 companies will have an EPS CAGR exceeding 40% and gross margin greater than 45% by 2028, and Seagate and Western Digital are among them. If further filtered for companies with free cash flow (FCF) profit margins above 30% and returning 75% or more of FCF to shareholders, only Seagate and Western Digital would remain.

Compared with the memory market, the HDD market structure is more favorable: only 3 players (the first two control 90% of the market), no Chinese competitors, data center revenue exposure as high as 80%+, and no新增 greenfield capacity. In 2026, the combined capital expenditures (Capex) of Seagate and Western Digital are close to about $1 billion, far below the spending of the global top five memory players, which is over $90 billion.

The above excellent content comes from the Chasewind Trading Desk.

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