Morgan Stanley recently released an IT hardware industry report focusing on the hard disk drive (HDD) sector, believing that the HDD industry is entering a "Stronger For Longer" cycle, with the industry's upward peak extending to 2028 (CY28), currently in the mid-cycle phase. The firm significantly raised performance forecasts and target prices for Western Digital (WDC.US) and Seagate Technology PLC (STX.US), maintaining "Overweight" ratings for both companies, with Western Digital as the preferred target.

From the demand perspective, HDD demand is experiencing explosive growth driven by both cloud capital expenditure (Capex) and AI. Regarding cloud capital expenditure, the top 11 global cloud vendors are expected to spend $459 billion in capex in 2025, up 61% year-over-year, with growth maintaining 16% in 2026. Morgan Stanley forecasts global data center total spending to reach $2.9 trillion from 2024-2028, with 85% directed toward AI-dedicated data centers.

Western Digital and Seagate Technology show high correlation of 0.8-0.9 between revenue and cloud capex, with cloud business accounting for over 75% of both companies' revenue, making cloud spending growth directly drive HDD demand. In the AI sector, AI inference workloads have become a key incremental driver - global cloud vendors' token processing volumes continue to climb, with multimodal data (video, image) generation surging. The data volume of one minute of compressed video is approximately 20,000 times that of ordinary text pages, significantly boosting storage demand. Microsoft's Wisconsin AI data center storage system already spans the length of five football fields, confirming AI's massive demand for HDD storage.

Additionally, HDDs occupy a core position in cloud storage, with 82% of cloud storage capacity in 2025 carried by HDDs. Near-line HDDs (NL HDDs) cost only 1/8 of enterprise SSDs (eSSD) per EB in procurement costs, creating an irreplaceable cost advantage.

Morgan Stanley believes supply-side constraints exacerbate supply-demand imbalances, driving HDD prices upward. The firm estimates the HDD market supply gap over the next 12 months at approximately 150EB, representing 10% of market demand, with this gap persisting until CY28.

The core reason for supply constraints lies in the extreme difficulty of HDD capacity expansion: building a new production facility requires 12 months for equipment procurement, personnel recruitment, and production line certification, followed by another 12 months of production ramp-up to achieve stable output, with single facility construction costs exceeding $500 million. The industry tends to meet demand through increasing single-disk capacity (such as areal density technology) rather than capacity expansion to maintain high profit margins.

Regarding pricing, Western Digital issued a letter to customers on September 12, 2025, announcing "gradual price increases for all HDD products," with Seagate Technology following suit, with expected increases of 7-10%. Major cloud vendors have signed long-term agreements (LTAs) or purchase orders (POs) with HDD manufacturers to secure supply, with some orders covering until the first half of 2027, providing 18 months of demand visibility for the industry - the first time in Morgan Stanley's 10 years of HDD industry coverage.

In terms of corporate performance and valuation, the firm significantly raised financial forecasts for Western Digital and Seagate Technology, listing Western Digital as the preferred target. Morgan Stanley expects Western Digital's FY26-FY28 revenue to be $11.286-15.166 billion, up 3%-32% from previous forecasts, with EPS of $7.03-12.84, up 6%-58%, and gross margins rising from 42.9% in FY26 to 47.5% in FY28. The target price is set at $171, representing 60% upside potential, with a bull case scenario of $215, up 111%.

Western Digital currently trades at a 25% valuation discount compared to Seagate Technology. Morgan Stanley considers this discount unreasonable, as its UltraSMR high-capacity hard drives have strong short-term competitiveness, will maintain leading HDD revenue and profit share, and debt deleveraging and accelerated share buybacks will narrow the valuation gap.

For Seagate Technology, Morgan Stanley expects FY26-FY28 revenue of $10.462-13.673 billion, up 3%-17%, with EPS of $10.71-20.54, up 4%-26%, and gross margins rising from 40.5% in FY26 to 47.9% in FY28. The target price is $265, representing 22% upside, with a bull case of $341, up 57%. Its advantage lies in leading HAMR (Heat-Assisted Magnetic Recording) technology, with 40TB+ HAMR hard drives launching in the second half of 2026 (12 months ahead of Western Digital), expecting HAMR to contribute over 50% of gross profit in FY27, driving gross margins to catch up and slightly exceed Western Digital by the end of 2026.

The firm believes the HDD industry has structural revaluation potential, with the core being "industry characteristics shifting from cyclical to structural growth," and current valuations significantly below reasonable levels. In terms of earnings growth, Western Digital and Seagate Technology show over 35% EPS compound growth over the next three years, ranking in the top 25% of hardware, semiconductor, and networking industries (peer median of 25%).

However, in valuation terms, both companies currently trade at PE ratios of 14x and 18.3x respectively, in the bottom 25% of the industry (peer median of 30.3x), with EV/Sales of only 4-4.5x. Through "operating margin-EV/Sales" regression analysis (R²=0.8271), the implied reasonable target multiple is 8x, representing 80% upside potential.

Morgan Stanley believes that reduced industry cyclical volatility combined with oligopolistic market structure (Western Digital and Seagate Technology dominating the market) should warrant HDD companies receiving higher-than-historical-cycle valuation premiums (historical PE peaks of 12-14x, current target PE of 17.5-20x).