Western Digital vs. Seagate: Which Is the Better AI Infrastructure Stock to Own for the Next 5 Years?

Two of the best stocks in the world right now are Western Digital (NASDAQ: WDC) and Seagate Technology (NASDAQ: STX).

They are both in the same business, making high-capacity hard disk drives (HDDs) and storage drives for AI computing and data centers. And they are both in the enviable position of being in the middle of a supercycle, where demand for their products is outpacing supply, giving them massive pricing power.

They are also the two leaders in this booming space, dominating the market as a virtual duopoly. It really doesn't get much better than that, which is why they have both seen ridiculous gains. Seagate stock is up 235% year to date and 292% over the past 12 months. Western Digital stock is up 164% year to date and 278% over the past 12 months.

And their longer-term returns are remarkably similar. Seagate has an average annualized return of 141% over the past three years and 62% over the past five years. Western Digital has a three-year average return of 136% and a five-year average return of 61%.

Given their similarities, strengths, and track records, should we expect anything different over the next five years? Is one a better long-term buy than the other? Let's take a look.

Image source: Getty Images.

HAMR time

The next-generation technology for storage drives is heat-assisted magnetic recording, or HAMR. It is technology that allows for more storage than the energy-assisted perpendicular magnetic recording, or ePMR.

Seagate has already mostly transitioned to HAMR technology in its drives, while Western Digital is planning on rolling out its HAMR drives starting in the first half of 2027, CEO Irving Tan said on the recent earnings call.

Meanwhile, Seagate CFO Gianluca Romano said that 40% of its shipments at the end of the June-ended quarter were HAMR drives, and the new, higher-capacity products are contributing meaningfully to earnings. Management is targeting 70% of its shipments to be HAMR drives by June 2027. Ultimately, said CEO Dave Mosley, "HAMR's going to completely take over the portfolio."

Seagate's growth is slightly more accelerated

With the HAMR technology further along, has that given Seagate an advantage? Seagate had higher revenue growth in the most recent quarter, with sales rising 50%, compared to 44% for Western Digital. Also, its operating margin was higher at 43% compared to 41.7% for WDC.

For the current quarter, Seagate is targeting a 12% increase in revenue while Western Digital is anticipating 9% sales growth. Further, the gross margin is targeted to rise to 57% this quarter for Seagate, up from 52.7%. For Western Digital, the gross margin is targeted for 55.5% at the midpoint, up from 54.4% in the last quarter.

On Western Digital's last earnings call, an analyst asked what was causing the projected divergence. "Is that due to their earlier ramp of HAMR? Is it a difference in timing of contracts?" CJ Muse from Cantor Fitzgerald asked. "Perhaps you're selling fewer bits into the open market. Do we need to wait for HAMR in calendar 2027, or are there other drivers that can allow you to push higher?"

Tan said there are several factors that create quarter-to-quarter variations, including timing and pricing of long-term agreements and the introduction of new platforms. Tan said the company started shipping its higher-capacity 40-terabyte ePRM drives in the last quarter and is targeting the 44-terabyte HAMR drives next year.

"That, again, will drive our ability to ship more higher-capacity drives into the marketplace, and provide some additional upside opportunity from pricing," Tan said on the call.

Western Digital's valuation advantage

One key advantage that Western Digital stock has is its valuation. It is trading at just 17 times earnings and 23 times forward earnings. It also has a five-year price/earnings-to-growth (PEG) ratio of 0.90. A PEG below 1 means it is undervalued relative to its earnings expectations.

Seagate is a bit more expensive, with a P/E ratio of 66 and a forward P/E of 25. However, its five-year PEG is even lower than WDC's at 0.53.

Seagate is rated a buy by 83% of analysts with a median 12-month price target of $1,165 per share, which suggests 28% upside. Western Digital is seen as a buy by 76% of analysts with a median price target of 668 per share, suggesting 50% upside.

Looking longer-term, both companies remain in high demand and are actively booking long-term agreements out to 2028, 2029, and beyond. Based on its valuation, Western Digital looks like the better long-term buy right now. But both would be great stocks to own for the next five years.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Western Digital. The Motley Fool has a disclosure policy.