At the Ira Sohn conference yesterday, Jim Gundlach proposed an interesting short idea, and it’s been moving the market today. Chanos said his idea for a short at the moment was the hard drive maker Seagate Technology PLC (NASDAQ:STX). An hour later, David Einhorn, who owns about 2 percent of the company, took to the stage.
Chanos On Seagate Technology:
The rationale for Chanos’ short was clear and concise, and it resounded with investors. Chanos outlined a path for hard drive makers in general, and it was one that led toward chaos and destruction. According to the hedge fund manager, companies like Seagate Technology PLC (NASDAQ:STX) lag the PC market by about a year.
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That means that in the next twelve months he expects to see huge decreases in the earnings and revenue of companies like Seagate Technology PLC (NASDAQ:STX) as demand for their products erodes. Like all of the most tempting investment ideas, the short is based on a couple of mega-trends.
The first mega-trend is the move from personal computers to mobile devices. While most personal computers still use traditional hard drives, mobile devices do not. As the demand for PCs falls so will the demand for hard drives. Even in the PC market itself, many computers now use memory similar to that found in mobile devices, and forgo hard drives altogether.
The second major trend is the growth of cloud storage. Chanos takes an interesting view of the hard drive market to push this point, painting the devices as just another form of storage. There seems little wrong with that rationale. As use of the cloud grows, supply of storage increases by leaps and bounds. Demand can’t keep up and the efficiencies of cloud storage mean consumers are likely to benefit from lower costs.
David Einhorn on Seagate Technology:
According to his most recent 3-F filing, David Einhorn owns 2.33 percent of Seagate Technology PLC (NASDAQ:STX). He’s been invested in the firm for about a year at least, and his rationale was simple—the company was undervalued. A year ago he may have been right but now things aren’t as clear cut.
Since last May, stock in Seagate Technology PLC (NASDAQ:STX) has risen in value by more than 30 percent. It rose reasonably steadily in 2013, until Chanos decided to talk about it at least. Einhorn may have already sold out of Seagate Technology PLC (NASDAQ:STX). Chanos made some good points, but we’ll have to wait for the 13F.