It is no secret that AI as a topic, its various applications, and in consequence stocks related to AI are receiving much attention. More and more challenge the sustainability of this rapid rise over the last few years, especially as the question of profitability remains unanswered. While everyone is aware of stocks like Nvidia, Oracle or critical suppliers like Micron, as well as multiple AI chatbots, the AI mania has pulled up an otherwise boring sub-segment: storage stocks. Is this justified? All my paid-members receive my latest stock idea: a growing franchise that’s set to dominate the eye care market.
Summary and key takeaways from today’s Weekly
– AI is not only dominating big tech stocks, but also other tech sub-sectors like storage.
– Historically, price per storage was in decline thanks to technical deflation. This is currently not the case, resulting in strong tailwinds for these companies.
– I’d be very cautious in this sector, as valuations have shot up dramatically.
By questioning or challenging the profitability of AI, I of course mean the end applications for users, namely ChatGPT, xAI’s Grok, Perplexity, and all the other chatbot apps. All we hear frequently is that they burn cash and raise equity.
What we don’t hear is that any of these services has started to generate cash.
This shall not be an excuse for the big tech companies that invest heavily into the AI infrastructure which is consuming huge amounts of cash (see here my critical Weekly about Meta)– with more and more money thrown into the pot every year. They can do that because they have profitable core businesses to subsidize these efforts.
But else, results of these AI adventures remain undisclosed.
To built the necessary infrastructure, the first thing that likely comes to one’s mind are GPU’s. That’s far from everything, as much more components are needed. One is RAM, random access memory, that’s needed to keep tasks open and running. Then there is storage, called ROM, or read only memory. The latter is known from hard disk drives, HDDs, and solid state drives, SSDs (also known as flash drives).
And it’s exactly this sub-segment, data storage, that has surprised many market observers this year. The respective stocks have gone almost vertical, creating some of the S&P 500’s best performers so far this year.
The start of a phenomenal bull run?
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both as per 15 October 2025 market close – since August 2022
Spinning fast, but likely too fast
Everyone who has a computer, tablet, or smartphone knows what storage is.
At some point always full with too little free space left, storage is where data files like photos, videos, in the past also music files, but likewise documents of all sorts (letters, forms, PDFs, spreadsheets, presentations, program files / apps, etc.) are being kept until they are needed. Or not, as plenty of data ends up being forgotten, kept in duplicates or simply trash that’s not needed.
Storage space is needed where data exists.
In that sense, it is little surprising that AI applications need plenty of storage, too. While parts of the needed information are being sourced from the web, it is also true that certain training material is being stored by AI developers privately for their AI tools with exclusive access.
As further background information, there is so called “cold storage” and “warm storage”. The former does not need to be accessed frequently (think of your holiday photos from ten years ago), while the latter does. This is important, because the more often certain information or data needs to be read, the more speed is likely necessary, especially if quick answers shall be generated.
Cold storage on the other hand has different requirements.
And this leads us to HDDs, hard disk drives, and SSDs, solid state drives or flash drives. HDDs are mainly used for cold storage, while SSDs can play out their speed advantage for quick and warm access. Other key differences are max storage capacity (where HDDs excel), cost of storage (again HDDs), and robustness, size, electricity consumption as well as noise – where SSDs have an edge.
Despite an ongoing transition from HDDs to SSDs in many areas, HDDs still have a market share of around 80%, when measured in total storage size. So in a nutshell, HDDs, while having being in the slow process of waning importance as flash drive adoption rises, especially in consumer electronics, the fact of the matter is that with AI, HDDs have staged a phenomenal comeback.
Storage is everywhere and it’s experiencing a bull market.
I do not want to distinguish in this Weekly which form of storage is better.
Both forms have seen their company’s stocks going through the roof. And I am not exaggerating, as we can find them among the top performers over the last twelve months in the S&P 500.
And since the beginning of 2025, it is even more pronounced. Easy and almost effortless gains of 150% and 160%?
(the arrows show other tech / AI stocks)
This might be a bit surprising for those who don’t check such data frequently – including me. For full disclosure, we have seen above HDD heavyweights Western Digital (ISIN: US9581021055, Ticker: WDC) and Seagate (ISIN: IE00BKVD2N49, Ticker: STX).
Both dominate the strongly consolidated HDD market.
On the flash drive side, we have SanDisk (ISIN: US80004C2008, Ticker: SNDK). Other players like Samsung have SSDs as a side hustle, while SanDisk is a pure-play in this regard. Anyway, SanDisk was bought in 2016 by Western Digital which wanted to future-proof itself.
But earlier this year, WDC spun off SanDisk again, as WDC’s legacy business got some wind under its wings again with high demand and rising margins, while remaining relatively asset light with comparatively little capital intensity.
SanDisk on the other hand, is more capital intensive.
Before we take a deeper look into the numbers, here are the charts of this trio. While they dipped heavily during the April-panic, especially over the last couple of months, nothing was able to stop them thereafter. The previously mentioned returns are since the beginning of 2025. Had one bought during the April correction, potential gains would have been much more significant by many factors.
SanDisk has more than doubled, almost tripled since early September.
Seagate and Western Digital rose each by more than 3x, almost 4x, from the April lows. In the case of WDC, I’ve found it interesting that the stock seemed to have been in a volatile long-term decline, with its previous all-time high had taken place around 2014 or more than a decade ago.
This is history now.
The reasons for this gigantic moves are AI, AI, and did I say AI? No seriously, it’s the strong demand now paired with expectations for more to come in the future. More AI needs more data which needs more storage. That’s the simple formula.
But is it so simple?
Let’s put it this way, as long as the belief in this view remains alive, it is possible these stocks continue to run even higher. The market is pricing future expectations.
On the other hand, if something breaks, it could get ugly. Really ugly.
I’d like to use Western Digital as an example, though broadly speaking this applies to the entire storage sector. When and if demand evaporates, there will be no hiding. Storage is exactly the same a cyclical sector like all other demand-sensitive tech areas. Currently, it does not look this way, but cyclicality will return sooner or later again.
WDC over the last few years experienced strong sales growth, almost out of nowhere…
…and noticeable margin expansion:
While the demand side is easily understandable, the significant margin explosion is the result of a phenomenon the storage industry did not have in the past.
Price per storage unit (usually GB or TB, gigabytes and terabytes) has stopped falling.
You will likely be aware that storage a decade ago was brutally expensive. Not to mention two decades ago. Today, they seem to throw around GBs almost for free. HDD has always been much cheaper than the newer SSD, with various pros and cons.
What also happened in past cycles is storage producers (the same applies to RAM and chips) at some point when demand got too hot started to overproduce – which crashed margins and then the business, sending it into a downward spiral until the cycle began fresh anew.
This time, they do not overproduce.
Western Digital even said that they produce significant part on demand, with some of their customers holding stock of only a week. With supply not being ramped up aggressively, as can be seen by moderate capex, prices are at least stable, in the case of SSDs keep on rising even. Again, because this is likely the key message: this is unprecedented and very likely not sustainable!
Ignore the first big bars above as this was Western Digital inclusive of SanDisk. What’s more interesting, proofing what I said above, is that despite booming AI demand, WDC’s capex remains flat. It is even falling modestly.
How do I know demand is coming from AI?
The cloud segment is rapidly rising, while client and consumer are in decline, as they switch to faster, quieter, and more compact flash drives.
It is unprecedented that storage is not getting cheaper currently. The technical deflation is gone. Technical progress results in better products getting cheaper and more affordable over time.
The consequence? Higher margins. Not just on a gross level by the way.
Or to say it in my words: AI-ed – artificially inflated.
That’s why I am very skeptical about any valuation figures at the moment, as earnings, but also cash flows, are boosted and inflated during this cyclical upswing.
For me, it is only a matter of time until a) the industry experiences a downswing again, and b) storage starts to get cheaper again. I would not be surprised, if these storage stocks collapsed by 70–80% or so in consequence. Sounds dramatic today, but it would not be for the first time.
And relatively quickly without major pre-warning.
In 2018, WDC stock collapsed from above 100 bucks to 35 in just half a year. Or more recently, from summer 2024 until April of this year, from 75 USD to below 30 USD.
So, better be prepared.
Looking at some valuation metrics, we can quickly determine whether the stocks are historically cheap. I am starting with a look at Western Digital’s enterprise value to sales ratio. I fully acknowledge that sales are rising strongly, but for me this looks to be priced in.
During the last major trough, EV / sales fell strongly below 1x, so that 4x looks not like a convincing buy to me. Even if the last big low will not be seen again, the historical range is more 1–2x, reaching up to 3x.
A 50% correction would be nothing unusual.
Free cash flow has been a bit lumpy, so that I cannot show a chart. But the current estimate is up to 2.5 billion USD in FCF for the fiscal year until next summer. Compared to an EV of 42 billion USD, the multiple is 17x. Does not sound extremely high, but keep in mind what I wrote about margins and storage prices.
Such tech companies have plenty of hard assets if they produce themselves in own manufacturing facilities. This is the case with Western Digital, although their PPE (property, plant and equipment) position on the balance sheet is relatively small, likely due to being a more mature sub-sector with less capital intensity.
The rest of assets is cash, receivables, inventories, and a substantial portion of goodwill. The latter makes the tangible book value not really usable. But the total book value might offer another view to put the current valuation into its historical context.
EV / sales looks the same for Seagate, while book value is highly negative.
SanDisk has a very limited history since its public re-listing this year, so I’ll leave it with that.
But I guess it won’t be surprising to hear me concluding that storage stocks are currently spinning too fast and too hot.
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Conclusion
AI is not only dominating big tech stocks, but also other tech sub-sectors like storage.
Historically, price per storage was in decline thanks to technical deflation. This is currently not the case, resulting in strong tailwinds for these companies.
I’d be very cautious in this sector, as valuations have shot up dramatically.
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