On Monday, Western Digital (WDC.US) rose more than 7% in early trading, while Seagate Technology (STX.US) gained over 5%. In the previous trading session, news of Toshiba Corp. (TOSYY) expanding hard drive production triggered a sector-wide pullback, sending both stocks down more than 10%.

Subsequently, Morgan Stanley and Bernstein released research reports in succession, pushing back against market panic. Both institutions argued that the market overreacted to the Toshiba expansion news, and that the actual impact on industry supply would be limited. AI agent tasks and physical AI are generating incremental storage demand, and the tight supply-demand dynamics for HDDs are expected to persist. Both maintained bullish ratings on Seagate and Western Digital, with Morgan Stanley naming Seagate as its top pick.

Morgan Stanley, after conducting supply chain visits and research, stated that the capacity expansion at Toshiba's Philippines factory is a project that has been planned for two years, with an annual capacity growth rate of approximately 30%, merely in line with the overall industry supply growth rate and insufficient to catch up with rapidly expanding market demand. Constrained by core component limitations from TDK and Resonac, as well as lagging technology roadmaps, the timeline for the expansion is overly aggressive and difficult to achieve. The 30% market share target mentioned in a Nikkei report is an outdated goal that is very difficult to reach under current conditions; a reasonable expectation is that Toshiba's market share may only rise to 12-13%. Meanwhile, Morgan Stanley confirmed that Seagate and Western Digital currently have no new expansion plans, and industry pricing strategies have not changed.

On the demand side, Morgan Stanley noted that HDD demand has accelerated over the past one to two months. Beyond traditional public cloud providers, emerging cloud vendors and humanoid physical AI companies have become new sources of procurement. AI agent workloads generate large volumes of context data that require persistent storage, further driving hard drive consumption. Spot market prices have strengthened, with non-long-term agreement spot quotes reaching 3-5 cents per GB, significantly higher than contract prices, validating the upward pricing logic for the industry. The industry supply gap is estimated at approximately 300EB in 2026 and will widen to 400EB in 2027-2028. On valuation, Seagate trades at 10x PE based on 2028 base-case EPS and only 6.8x under the optimistic scenario; Western Digital trades at 8.5x PE based on 2028 base-case EPS and 5.8x under the optimistic scenario, making valuations attractive.

Bernstein likewise described the Toshiba expansion as a "storm in a teacup." Even under the optimistic assumption that Toshiba nearly doubles its capacity while Seagate and Western Digital maintain 25% annual capacity growth, Toshiba's market share could only rise from 11.2% to 16.8%, far short of 30%. From a capital expenditure perspective, the reported $380 million investment is insufficient to support a large-scale doubling of capacity. Toshiba's areal density technology significantly lags behind peers, and its high-capacity product iterations are delayed, meaning the expansion would be forced to add more physical platters, creating greater capital pressure and prominent execution risks. Bernstein reiterated its "outperform" ratings on both companies, with a price target of $1,350 for Seagate and $770 for Western Digital, recommending investors take advantage of this stock price pullback to position themselves.