Consensus is far behind reality! Morgan Stanley: The two mechanical hard drive giants are underestimated, supply shortage may last until 2029, gross margins expected to enter the mid-to-high 50% range.

Consensus is far behind reality! Morgan Stanley: The two mechanical hard drive giants are underestimated, supply shortage may last until 2029, gross margins expected to enter the mid-to-high 50% range.

Wall Street's consensus is once again seriously lagging behind reality.

According to Chase Wind Trading Desk, Morgan Stanley's latest channel research shows that demand and pricing in the hard disk drive (HDD) market are experiencing unprecedented strengthening, and supply shortages are expected to last until calendar year 2028 (CY28).

Based on this, Morgan Stanley reiterates its overweight rating on Seagate (STX) and Western Digital (WDC), and upgrades Seagate to replace Western Digital as its "Top Pick." Morgan Stanley sharply raises Seagate's target price from $468 to $582 (bull case up to $796), and Western Digital's target price from $369 to $380 (bull case up to $519).

The market is currently severely underestimating the leverage effect of the HDD duopoly in AI and cloud data center spending. Morgan Stanley points out that these two stocks are currently trading at only 13-14 times the expected earnings per share (EPS) for calendar year 2027 (CY27), while Morgan Stanley's CY27/28 EPS forecasts are 25%-50% higher than Wall Street consensus, and gross margin forecasts are 400-500 basis points higher (up to 700 basis points). With accelerated cost reduction from high-capacity technologies such as HAMR and pricing power far beyond expectations, Seagate and Western Digital are ushering in a golden window for gross margins to enter the mid-to-high 50% range. Tactically, as Seagate has a valuation discount and faster gross margin expansion, Morgan Stanley suggests investors switch their top pick to Seagate.

A “Stronger for Longer” HDD Cycle: Supply-Demand Imbalance Will Last Until 2029

Morgan Stanley's “Stronger for Longer” thesis has not changed; in fact, it is being reinforced. Research shows that despite the HDD industry's unit production seeing unexpectedly strong growth in the low to mid single digits (LSD-MSD%), the industry's exabyte (EB) shortage in CY26 will reach 200EB (10% of the market), and nearly 250EB in CY27.

This strong demand stems from ongoing migration of cloud workloads and widespread adoption of AI (accelerating data generation).

Currently, HDDs still store about 80% of global cloud data. Under a conservative assumption (annual cloud EB demand grows by 30%, eSSD grabs 2 percentage points of share per year, and HDD suppliers insist on not adding any new greenfield capacity), Morgan Stanley expects HDD supply and demand will not reach balance until calendar year 2029 (CY29), which is 12 months later than previously expected.

Pricing Power and Cost Reduction: Gross Margins Far Exceed Wall Street Expectations

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

On the cost side, as both suppliers shift to 40TB+ high-capacity drives starting in C2H26, per-EB cost will rapidly decline over the next roughly six quarters. This "continuously widening gap between price per GB and cost" will drive Seagate and Western Digital's gross margins into the mid-to-high 50% range by CY27. Morgan Stanley's latest gross margin forecast before CY27 is 400-500 basis points higher than Wall Street consensus.

Tactical Portfolio Switch: Why Change the Top Pick from Western Digital to Seagate?

Although Morgan Stanley remains extremely bullish on Western Digital, it is shifting its recent relative preference and "Top Pick" to Seagate for the following four core reasons:

  1. Catalyst Realization: The key catalysts previously favoring Western Digital (closing the valuation gap with Seagate, using SNDK shares for deleveraging) were realized last quarter.
  2. Valuation Discount: Seagate's current P/E ratio is more than 1 turn lower than Western Digital's, while Morgan Stanley believes both should trade at the same level.
  3. Faster Gross Margin Expansion: Bottom-up per TB cost analysis shows that, thanks to strong HAMR product portfolio transition, Seagate's gross margin expansion over the next 12 months should slightly outpace Western Digital (about 50 basis points faster).
  4. Greater EPS and Target Price Upside: Morgan Stanley sees more relative upside in Seagate’s EPS and target price over the next 12 months. Additionally, Seagate is expected to repay its convertible bonds earlier, reducing equity dilution.

Severely Underestimated Core AI Data Center Assets

Morgan Stanley believes this is a prolonged cycle (i.e., 2027 is not the peak) and thus maintains a base target P/E of 18x on Seagate and Western Digital.

Within the Russell 3000 Index (market cap over $5 billion), only about 20 companies are expected to have EPS growth rates over 40% and gross margins above 45% by 2028, with Seagate and Western Digital among them. If further filtered by companies with free cash flow (FCF) profit margins above 30% and returning over 75% of FCF to shareholders, only Seagate and Western Digital remain.

Compared with the memory market, the HDD market structure is superior: only three players (the top two control 90% of the market), no Chinese competitors, data center revenue exposure over 80%, and no new greenfield capacity. In 2026, Seagate and Western Digital’s combined capital expenditure (Capex) is around $1 billion, far lower than the over $90 billion spent by the world’s top five memory players.

 

 

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