Seagate Technology (STX) and Western Digital (WDC) supply high-capacity hard drives used by cloud providers to store the growing volumes of data produced by artificial intelligence workloads.The companies have become two of the market’s most closely watched AI infrastructure stocks as hyperscalers expand data-center capacity and reserve hard-drive supply years in advance.Both stocks moved sharply lower on July 27 despite a bullish analyst call.Seagate shares fell about 6.1% to $800 around midday July 27, and Western Digital declined about 6.1% to $487.87.Seagate will report fiscal fourth-quarter and full-year results after the market closes on July 28. Western Digital is scheduled to report on Aug. 5.The reports will show whether limited hard-drive supply is still helping the companies raise prices and protect margins.They will also show whether production constraints are limiting the number of drives Seagate and Western Digital can deliver.Wedbush analyst Matt Brysonraised his Seagate price target to $1,000 from $825 and lifted his Western Digital target to $650 from $540.Bryson maintained Outperform ratings on both stocks.
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Wedbush expects the HDD shortage to continue into 2027Wedbush expects growing demand and limited hard-drive supply to continue well into 2027.Cloud providers are reserving high-capacity drives as they expand storage for AI training data, inference output, customer records and backups.The shortage gives Seagate and Western Digital more leverage in negotiating new customer agreements because hyperscalers have fewer suppliers with available capacity.Related: Nvidia just locked down deal that changes AI raceHowever, higher market prices may take time to reach Seagate’s financial results.The company has already committed much of its fiscal 2027 capacity through long-term agreements that set volumes and pricing in advance.That means the strongest benefit may come when existing agreements reset or Seagate signs contracts for later delivery periods at higher prices.Seagate had declined about 17% in July entering Monday, while Western Digital had fallen more than 20%, according to Investor’s Business Daily.The pullback shows investors are waiting for more details on contract pricing, available capacity, and whether limited production will prevent the companies from accepting additional orders.More AI:The new Chinese AI model rattling U.S. tech investorsAnthropic restores access to Mythos 5 for select organizationsSoftBank CEO offers stinging critique of Musk’s AI betAI expansion is increasing demand for mass-capacity storageAI models require storage before and after they run.Companies retain training datasets, model checkpoints, inference results, security logs, and customer information inside cloud data centers.High-capacity hard drives allow cloud providers to store large amounts of that information in a smaller physical footprint.A recent Bank of America report placed that demand inside a wider shift in technology investment.The debate around frontier technologies has shifted from experimentation to scalability.BofA did not mention Seagate or Western Digital in that section of the report.Its scalability framework helps explain why storage availability has become part of the AI infrastructure buildout alongside processors, networking equipment, and electricity.AI companies can experiment with limited computing capacity.Running those products for millions of customers requires much larger systems for computing, moving, and retaining data.The demand has already affected Seagate’s production planning.CEO Dave Mosley said in May that building new factories would take too long and could leave the company with unused capacity if demand later weakened.Mosley said recording-head wafers had lead times exceeding nine months.Finished drives required roughly another quarter after that stage.Seagate later said its nearline capacity was almost fully allocated through calendar 2027.Nearline drives are high-capacity products designed for cloud and enterprise data centers.The storage shortage can also cap revenue growthLimited supply can lift prices when customers compete for available capacity.It creates a different problem when manufacturers cannot produce enough drives to accept additional orders.Seagate and Western Digital therefore need to show that pricing gains outweigh the revenue they may be leaving behind due to constrained production.Related: Mark Zuckerberg, Microsoft CEO just made major AI decisionTheir margin benchmarks are already high.Seagate reported a 47% non-GAAP gross margin in its fiscal third quarter, up from 36.2% a year earlier.The company forecast fiscal fourth-quarter revenue of $3.45 billion, plus or minus $100 million.It projected non-GAAP earnings of $5 a share, plus or minus 20 cents.Western Digital reported fiscal third-quarter revenue of $3.34 billion and a non-GAAP gross margin of 50.5%.It forecast fourth-quarter revenue of about $3.65 billion and a non-GAAP gross margin of approximately 51.5%.Those results leave little room for a quarter that merely meets expectations.Investors will need evidence that new contracts are being signed at higher prices, recent margin gains can continue, and customer commitments extend beyond the capacity already reserved for 2027.Key numbers ahead of Seagate and Western Digital earnings$1,000: Wedbush’s new Seagate price target$650: Wedbush’s new Western Digital price target47%: Seagate’s latest non-GAAP gross margin50.5%: Western Digital’s latest non-GAAP gross margin$3.45 billion: Seagate’s fiscal fourth-quarter revenue guidance midpoint$3.65 billion: Western Digital’s fiscal fourth-quarter revenue guidance midpointThrough 2027: Period for which Seagate’s nearline capacity was almost fully allocatedWedbush’s targets assume that constrained supply will continue supporting contract prices and margins.Seagate reports first, giving investors the earliest indication of whether the recent decline has reset expectations or reflects concern that profitability is approaching a peak.Western Digital will face the same test the following week.Related: Cathie Wood buys $50.1 million of tumbling megacap stock