By Asa Fitch

In an AI boom that has made investor darlings out of chip makers like Nvidia and software developers like OpenAI, the lowly hard drive is enjoying a resurgence that investors are only starting to reward.

Hard-drive makers Western Digital and Seagate Technology Holdings, the two largest players in the industry, both reported around 30% higher revenue in their latest quarters. That may not be an Nvidia- or Oracle-style inflection. But hard-drive makers have been riding the coattails of companies like those to growth that would have been unthinkable a few years ago.

Underpinning the boost is artificial intelligence's voracious consumption of digital storage and rising prices for higher-capacity drives. In its latest financial report, Western Digital said the number of exabytes of storage it shipped -- an exabyte is a billion gigabytes -- rose to 190, up 32% from a year earlier. Seagate shipped 45% more of its own exabytes in the same period.

As long as the AI story stays intact -- and most recent signs point to it sustaining for a while -- there's little doubt the trajectory for hard drives will keep rising. There will likely be some lumpiness over the next few years as companies rush to buy hard drives and then spend time filling them up. But AI is different in important ways from other tech transitions that have lifted sales.

The last boost before the AI boom came during Covid lockdowns. People working and learning remotely in large numbers needed more digital storage. Things whipsawed when the pandemic waned and people returned to their old habits, though. Hard-drive revenue globally fell by about 30% in 2023 before the AI boom really kicked in, according to Gartner.

AI is different because companies that use huge amounts of data to train their models tend to keep it on hard drives rather than deleting it when they're done, industry executives say. That is a contrast with the usual practice of repurposing digital storage.

More crucially, perhaps, AI self-generates a lot of data in the form of text, pictures and increasingly video that needs to be stored somewhere. Google said last month that users of its Flow filmmaking tool had created 100 million AI videos in the three months since it launched in May -- requiring tons of storage.

Little surprise, then, that Gartner now expects global hard-drive revenue to be roughly $24 billion next year. That is about double what it was in the 2023 down year.

Despite that, investors haven't jumped wholeheartedly on the hard-drive bandwagon. Both companies' stocks have more than doubled over the past year, but are still nowhere near valuations worthy of caution.

Western Digital trades at about 16 times forward earnings; Seagate has a multiple of 20 times. Those aren't bargain-basement valuations, but they also don't reflect the opportunity before the companies. The tech-heavy Nasdaq index trades at an average multiple of about 29 times.

And the opportunity is growing. The AI shift has given Seagate and Western Digital -- effectively a duopoly in leading-edge hard drives with Toshiba a distant third -- a measure of power over customers that they didn't often enjoy in the past.

Big tech companies that offer cloud-computing services and develop leading AI models need them badly. It shows up in the hard-drive companies' sales: cloud computing accounted for 90% of Western Digital's revenue in its most recent quarter.

"You don't have AI without data, you don't have data without storage -- and so they fully understand that," Western Digital finance chief Kris Sennesael said at a Goldman Sachs conference last week.

With demand exceeding supply, hard-drive makers are signing long-term supply deals with customers stretching forward for a year or more -- something that didn't happen in the past. Pricing is also baked into them.

That visibility and pricing power has given the companies confidence to forecast an expansion in gross profit margins. These have already about doubled in the past two fiscal years to roughly 40%.

What's more, there is little chance of a competitive threat damping the companies' growth. Both are moving toward a new hard-drive storage technology called heat-assisted magnetic recording, or HAMR. Seagate is rolling it out now, and Western Digital is set to do so in a couple of years.

HAMR opens the way to larger-capacity drives -- 30 terabytes and more. The companies have been working on the technology for many years, and there's no easy path for competitors to challenge them.

There's also little to worry about in the shift toward the use of flash-storage drives -- so-called solid-state drives -- in data centers. Although SSDs can be quicker in accessing and transferring data, hard drives are significantly cheaper to buy and operate.

This relegates SSDs to operations where high performance is essential. Hard drives still account for around 80% or 90% of data storage in data centers, industry estimates suggest.

The hard-drive makers' fortunes are tied closely to the fate of the AI boom -- a risk, to be sure. But in a corner of the tech world that's about as unsexy as it gets, Seagate and Western Digital are making a case that boring can be bountiful.

Write to Asa Fitch at asa.fitch@wsj.com

(END) Dow Jones Newswires

September 19, 2025 05:30 ET (09:30 GMT)

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