Morgan Stanley is bullish on hardware: the HDD industry is entering a "long-term strengthening" cycle, with peak growth expected to be extended until 2028, targeting Western Digital Corporation (WDC.US) and Seagate Technology Holdings PLC (STX.US).

Morgan Stanley recently released a report on the IT hardware industry, focusing on the hard disk drive (HDD) sector, and believes that the HDD industry is entering a "Stronger For Longer" cycle in which the industry peak will extend until 2028 (CY28), currently in the mid-term of the cycle. The firm significantly raised its performance forecasts and target prices for Western Digital Corporation (WDC.US) and Seagate Technology Holdings PLC (STX.US), maintaining a "buy" rating for both companies, with Western Digital Corporation being the preferred target. From the demand side, HDD demand is being driven by both cloud capital expenditure (Capex) and AI, showing explosive growth. In terms of cloud capital expenditure, the global Top 11 cloud providers are expected to spend $459 billion by 2025, with a 61% year-on-year increase, maintaining a 16% growth rate in 2026; Morgan Stanley predicts total global data center spending to reach $2.9 trillion from 2024-2028, with 85% going towards AI-specific data centers. The correlation between revenue and cloud capital expenditure for Western Digital Corporation and Seagate Technology Holdings PLC is as high as 0.8-0.9, with over 75% of revenue coming from cloud services, directly driving HDD demand. In the AI field, AI inference workloads are a key increment the volume of token processing by global cloud providers continues to rise, and the volume of multimodal data (video, images) is increasing dramatically, with the data volume of compressing a 1-minute video being over 20,000 times that of a normal text page, significantly increasing storage demand; Microsoft Corporation's Wisconsin AI data center storage system is already the length of five football fields, confirming the massive demand for HDD storage in AI applications. Additionally, HDDs play a central role in cloud storage, with 82% of cloud storage capacity expected to be carried by HDDs in 2025, and near-line HDD (NL HDD) costing only 1/8 of enterprise SSDs per EB, providing a cost advantage that is difficult to replace. Morgan Stanley believes that supply constraints will exacerbate the supply-demand imbalance, driving HDD prices higher. The firm estimates that there will be a gap of about 150EB in the HDD market supply in the next 12 months, accounting for 10% of market demand, and this gap is expected to continue until before CY28. The core reason for the supply constraint is that expanding HDD production capacity is extremely challenging: building a new production factory takes 12 months to complete equipment procurement, personnel recruitment, and production line certification, followed by 12 months of production ramp-up to achieve stable output, with the construction cost of a single factory exceeding $500 million; the industry is more inclined to meet demand by increasing the capacity of individual disks (such as areal density technology) rather than expanding production, in order to maintain high profit margins. In terms of prices, Western Digital Corporation announced on September 12, 2025, that it would "gradually increase prices for all HDD products," with Seagate Technology Holdings PLC following suit, with expected increases of 7-10%; in order to guarantee supply, large cloud providers have signed long-term agreements (LTAs) or purchase orders (POs) with HDD manufacturers, with some orders covering the first half of 2027, providing 18 months of visibility for industry demand, marking the first time in 10 years that Morgan Stanley has covered the HDD industry. In terms of business performance and valuation, the firm has significantly raised its financial forecasts for Western Digital Corporation and Seagate Technology Holdings PLC, and has listed Western Digital Corporation as its preferred target. Morgan Stanley expects revenues for Western Digital Corporation for FY26-FY28 to be between $11.286 billion and $15.166 billion, an increase of 3% to 32% from previous forecasts, with EPS of $7.03 to $12.84, an increase of 6% to 58%, and gross margins increasing from 42.9% in FY26 to 47.5% in FY28; the target price is set at $171, with a 60% upside potential, which could reach $215 in a bull market scenario, an increase of 111%. Currently, Western Digital Corporation has a 25% valuation discount compared to Seagate Technology Holdings PLC, which Morgan Stanley believes is unjustified. Their UltraSMR high-capacity hard drives have strong short-term competitiveness, maintaining a leading revenue and profit share in the HDD market, with debt deleveraging and accelerated stock buybacks helping to narrow the valuation gap. In the case of Seagate Technology Holdings PLC, Morgan Stanley forecasts revenues for FY26-FY28 to be between $10.462 billion and $13.673 billion, a 3% to 17% increase, with EPS of $10.71 to $20.54, an increase of 4% to 26%, and gross margins increasing from 40.5% in FY26 to 47.9% in FY28; the target price is set at $265, with a 22% upside potential, which could reach $341 in a bull market scenario, an increase of 57%; their advantage lies in their leadership in HAMR (Heat-Assisted Magnetic Recording) technology, with a 40TB+ HAMR hard drive expected to be launched in the second half of 2026 (12 months earlier than Western Digital Corporation), with HAMR expected to contribute over 50% of gross profit in FY27, helping to surpass and slightly exceed Western Digital Corporation's gross profit margin by the end of 2026. The firm believes that there is a room for structural revaluation in HDD industry valuation, with the core being the shift from being a cyclical product to a structural growth product, with current valuations significantly below reasonable levels. In terms of profit growth, Western Digital Corporation and Seagate Technology Holdings PLC have a compound annual EPS growth rate of over 35% for the next 3 years, ranking in the top 25% among hardware, semiconductor, and networking industries (median among peers is 25%). However, in terms of valuation, the current PEs for the two companies are 14x and 18.3x respectively, in the bottom 25% of the industry (median among peers is 30.3x), with EV/Sales of only 4-4.5x; through a regression analysis of "operating margin-EV/Sales" (R=0.8271), the implied fair target multiple is 8x, with an 80% upside potential. Morgan Stanley believes that the reduction in industry cyclical volatility combined with an oligopoly market structure (with Western Digital Corporation and Seagate Technology Holdings PLC dominating the market) should lead to HDD companies receiving a valuation premium above historical cycles (historical PE peak was 12-14x, current target PE 17.5-20x).