Consensus significantly lags behind reality! Morgan Stanley: The dual oligopoly of mechanical hard drives is underestimated, and the supply gap may continue until 2029, with gross profit margins expected to enter the mid-to-high 50% range.

Ask AI · Morgan Stanley expects HDD gross margins to far exceed consensus—what are the key driving factors?

Wall Street consensus is once again seriously lagging behind reality.

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

Based on this, Morgan Stanley reiterates its Overweight rating on Seagate (STX) and Western Digital (WDC), and upgrades Seagate to “Top Pick” by replacing Western Digital. Morgan Stanley has raised Seagate’s target price from $468 to $582 (bull case up to $796), and raised Western Digital’s target price from $369 to $380 (bull case up to $519).

The market is currently severely undervaluing the leverage effect of the HDD duopoly in AI and cloud data center spending. Morgan Stanley notes that these two stocks are currently trading at only 13-14 times the expected earnings per share (EPS) for the 2027 calendar year (CY27), while Morgan Stanley’s CY27/28 EPS expectations are 25%-50% higher than Wall Street consensus, and its gross margin expectations are 400-500 basis points higher than consensus (up to 700 basis points). As high-capacity technologies such as HAMR accelerate cost reductions and pricing power exceeds expectations, Seagate and Western Digital are entering a golden window where gross margins move into the mid-to-high 50% range. Tactically, because Seagate currently has a valuation discount and gross margin expansion is faster, Morgan Stanley recommends that investors switch their Top Pick to Seagate.

“A stronger, longer” HDD cycle: the supply-demand imbalance will persist until 2029

Morgan Stanley’s “Stronger for Longer” logic has not only not changed, but is actually strengthening. Research shows that although unit output in the HDD industry will grow unexpectedly in the low to mid-single digits (LSD-MSD%), the industry’s exabyte (EB) shortage will still reach 200EB (10% of the market) in CY26, and will approach 250EB in CY27.

This strong demand is driven by the continued shift of cloud workloads and the widespread adoption of AI (accelerating data generation).

At present, HDDs still store about 80% of global cloud data. Under conservative assumptions (cloud EB demand grows 30% year over year, eSSD captures an additional 2 percentage points of share each year, and HDD suppliers do not add any new greenfield capacity), Morgan Stanley expects that HDD supply and demand will not reach balance until the 2029 calendar year (CY29)—which is 12 months later than previously expected.

Pricing power and cost reduction—both moving in tandem: gross margins will far exceed Wall Street expectations

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

On the cost side, as the two suppliers begin shifting to 40TB+ high-capacity drives in C2H26, the cost per EB will accelerate downward over roughly the next six quarters. This widening gap between “price per GB and cost” will drive Seagate and Western Digital’s gross margins to reach the mid-to-high 50% range when entering CY27. Morgan Stanley’s latest gross margin forecast is 400-500 basis points above Wall Street consensus before CY27.

Tactical repositioning: why switch the Top Pick from Western Digital to Seagate?

Although Morgan Stanley remains extremely bullish on Western Digital, for the following four core reasons, Morgan Stanley has shifted its near-term relative preference and “Top Pick” to Seagate:

1. Catalyst realization: The key catalysts that had previously favored Western Digital (narrowing the valuation gap with Seagate, and using SNDK shares to de-lever) were realized in the last quarter.

2. Valuation discount: Seagate’s current price-to-earnings (P/E) ratio is more than 1x lower than Western Digital’s, and Morgan Stanley believes the two should be valued at the same level.

3. Faster gross margin expansion: Bottom-up analysis of cost per TB shows that, thanks to the strong HAMR product portfolio transition, Seagate’s gross margin expansion over the next 12 months is expected to be slightly faster than Western Digital’s (about 50 basis points faster).

4. More upside room for EPS and target price: Morgan Stanley sees greater relative upside potential in Seagate’s expected EPS and target price over the next 12 months. In addition, Seagate is expected to repay its convertible bonds earlier, thereby reducing equity dilution.

Severely undervalued core assets for AI data centers

Morgan Stanley believes this is an extended cycle (i.e., 2027 is not the peak), so it maintains a baseline target P/E of 18x for Seagate and Western Digital.

Within the Russell 3000 Index (market cap greater than $5 billion), only about 20 companies are expected by 2028 to have an EPS compound annual growth rate (CAGR) of more than 40% and gross margins of more than 45%, and Seagate and Western Digital are among them. If we further filter for companies with free cash flow (FCF) profit margins above 30% and that return more than 75% of FCF to shareholders, only Seagate and Western Digital would remain.

Compared with the memory market, the HDD market structure is more favorable: there are only 3 players (the top two control 90% of the market), there is no China-based competitor, the data center revenue exposure is as high as 80%+, and there is no new greenfield capacity. In 2026, Seagate and Western Digital’s total capital expenditure (Capex) is close to about $1 billion—far below the spending of the world’s top five memory players, which is more than $90 billion.