Morgan Stanley's research predicts that mechanical hard disk drives (HDDs) will face even greater shortages "at least until 2028," with supplier pricing far above current levels.

Morgan Stanley's research predicts that mechanical hard disk drives (HDDs) will face even greater shortages "at least until 2028," with supplier pricing far above current levels.

The AI era's demand for data storage is reshaping the supply-demand landscape of the HDD industry—a sector once thought to be in decline is now experiencing an unexpectedly prosperous cycle.

According to "Chasing Wind Trading Desk," on June 15, Morgan Stanley released its IT hardware industry research report. Lead analyst Erik W. Woodring and his team conducted intensive visits to Asian markets over the past three weeks—including attending the Taiwan AI Summit, COMPUTEX Expo, and Western Digital's Asia roadshow—returning with key first-hand survey data. Their assessment: The upturn in the HDD industry is being extended, shortages are more severe than previously expected, and suppliers' pricing intentions are much stronger than the market realizes.

As a result, Morgan Stanley has significantly raised the price targets for related storage giants. Seagate's price target was raised from $767 to $1,035, and Western Digital's from $488 to $650; under extremely optimistic pricing scenarios, both companies' EPS are expected to achieve about 10-fold growth between CY25 and CY28.

Supply gap is bigger—and widening—than imagined

Changes on the demand side are the core driving force of this round of assessment.

Research shows that in 2026, nearline HDD supply will fall short of demand by about 300EB (exabytes), representing a 10%-15% gap; in 2027 and 2028, the gap will further widen to about 400EB each year.

Why is the gap widening? There are two drivers:

First, demand is accelerating. Growth of core cloud computing services exceeds expectations, and AI inference and agent workloads are pushing up shipments of general purpose servers, thereby boosting HDD demand. Hyperscalers currently deploy HDDs at nearly 100%, compared to the historical level of about 70%—meaning cloud providers are not stockpiling but buying as needed. ODM (original design manufacturers) have only 1-2 weeks of HDD inventory left; supply chains are extremely tight.

Second, supply is tightly controlled. HDD manufacturers deliberately avoid new capacity construction (no greenfield expansion). For the next 2-3 years, nearline HDD EB growth will be entirely supply-driven, with a projected CAGR of about 30-35%, while demand is growing at about 40-50%.

In short: demand grows faster than supply, and this gap will not disappear in the short term.

Pricing: Suppliers' target price is $25-30 per TB, double the current price

This is the most noteworthy part of the entire report.

Currently, Seagate and Western Digital's average blended price for nearline HDDs is $14.30-$14.90 per TB.

In April this year, the market already learned that suppliers may push prices to $20 per TB by 2027/2028. But this Taiwan survey brought back even more aggressive signals: suppliers' internal target price is $25-30 per TB.

The analysts were careful in wording, specifically noting this is a "target price, not a contracted price".

More direct signals come from the spot market—distributors are currently selling HDDs at $30-35 per TB for clients without long-term agreements (LTA), about 30% higher than previous data.

For hyperscalers, pricing changes are usually communicated in advance and implemented through quarterly price escalation clauses in contracts, making the process more controllable and predictable.

Another structural change : suppliers are proactively shortening the terms of long-term agreements.

Cloud providers wish to sign long agreements until 2032, but Seagate and Western Digital are unwilling to lock in commercial terms for more than 12 months. The reason is simple—HDD usage scenarios are expanding, shortages are worsening, their total cost of ownership (TCO) advantage over NAND flash is increasing, and currently no alternative technology threatens HDD's position. Suppliers are willing to give clients five years of capacity and technology roadmap visibility, but not to lock in pricing rights in advance, which is disadvantageous for suppliers.

Essentially, this is a process where pricing power shifts from buyers to sellers.

EPS elasticity: Almost all price increases directly convert to profits

There is a key financial logic to understand here: incremental pricing in HDD almost 100% converts to after-tax profits.

The reason is that suppliers are extremely restrained in expanding production capacity—no new greenfield plans; EB shipment growth for the next 2-3 years is fully supply-driven, with about 30%-35% CAGR. Under this framework, every penny of price increase requires no extra cost, and falls directly to profits.

Based on this, analysts' calculations are quite astonishing:

Under optimistic scenario: if nearline average price reaches $25/TB in CY27 (calendar year 2027), $30/TB in CY28 (consistent with Taiwan channel survey), then:

  • Seagate CY27 EPS could exceed $70, CY28 EPS could exceed $100
  • Western Digital CY27 EPS could exceed $40, CY28 EPS could exceed $70

Seagate and Western Digital's actual CY25 EPS are $10.24 and $6.95 respectively.

That is, in an extreme scenario, EPS could increase tenfold in three years.

Of course, this is not the base case. In the base forecast, nearline average price in CY27 is assumed to be about $19/TB, corresponding to:

  • Seagate FY27 EPS is $35.38, FY28 EPS is $70.64
  • Western Digital FY27 EPS is $22.40, FY28 EPS is $43.47

Even in this relatively conservative base case, the FY28 EPS forecast is about 70% higher than market consensus—Seagate FY28 consensus is about $40.60, Morgan Stanley predicts $70.64; Western Digital FY28 consensus is $26.20, Morgan Stanley predicts $43.47.

How big is the threat from new entrants?

The HDD industry is currently a highly concentrated oligopoly. The common external question: will new players enter to break this pattern?

Western Digital CEO Irving Tan provided a direct answer. He explained that the barriers to becoming a competitive new entrant are not about capital, but about three points:

First, the technology certification cycle is extremely lengthy. Certification of just the HAMR (Heat-Assisted Magnetic Recording) technology took over ten years.

Second, cross-disciplinary vertical integration capability is required. Magnetic science, material science, photonics, nanomanufacturing—internal integration of these knowledge fields cannot simply be bought with money.

Third, the supply chain is highly concentrated, with virtually no idle capacity. The HDD supply chain is extremely integrated, utilization rate is very high; new entrants hardly find external resources to leverage.

The market has not fully priced in this cycle

At current share prices, Seagate and Western Digital correspond to about 18x and 17x CY27 base EPS multiples, respectively.

For a company with over 75% three-year EPS compound annual growth rate, this valuation is not considered expensive—though there is a premium compared to historical HDD valuations (but HDD industry gross margin has never previously exceeded 50%).

More noteworthy is the optimistic scenario: based on optimistic CY27 EPS, Seagate and Western Digital are valued at just about 11.5x. This means that despite sharply upward EPS revisions over the past 18 months, share price re-rating remains inadequate.

The judgment in this framework: HDD is currently the “cleanest EPS upgrade and valuation re-rating story” in IT hardware coverage.

Both Seagate and Western Digital are rated “Overweight,” making them Morgan Stanley's top IT hardware recommendations.

In the short term (3-6 months), Seagate is listed as the Top Pick, because in the September 2026 quarter it may reprice early HAMR customers, with cost declines slightly faster than Western Digital and greater gross margin flexibility. From a longer term perspective, Western Digital’s optimistic scenario has slightly more upside, and its balance sheet leverage is slightly lower.

 

 

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The above content is from Chasing Wind Trading Desk.

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