4 Tech Stocks to Buy While the Chia Craze Runs Hot

Stocks to buy

China’s so-called cryptocurrency farmers are driving a rally in shares of consumer disk-drive makers Seagate (NASDAQ:STX) and Western Digital (NASDAQ:WDC). These stocks have gained 20% and 12%, respectively in the last 5 trading days. In particular, the new green cryptocurrency called Chia (CCC:XCH-USD), launched earlier this month, has caused a sharp rise in demand for hard disk drives (HDDs) and solid-state drives (SSDs).

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Pricing in the secondary market, particularly among Chinese e-commerce retailers like JD.com (NASDAQ:JD), Alibaba (NYSE:BABA) and Pinduoduo (NASDAQ:PDD), is meaningfully higher than usual. Ultimately, Chia could be a boost for storage stocks this quarter, but it will be short term.

I prefer WDC over STX as the better play in this space — for its stronger retail HDD presence and also improving flash memory demand. Meanwhile, Chia’s long-term impact on storage demand is sketchy, as it’s still too early to call this a viable cryptocoin.

Instead, I suggest buying WDC and Micron Technology (NASDAQ:MU) on pullbacks. Add to positions in Microsoft (NASDAQ:MSFT), my favorite large cap tech stock, and Honeywell (NYSE:HON) — important blockchain derivatives.

Accessing the Impact of Chia

  • We’ve seen this before with GPUs. Now, it’s happening with HDDs. We’ve already seen crypto mining boost demand for graphics cards, called GPUs (graphics processing units). The “great GPU shortage” has benefitted companies like Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC). Now, something similar may be happening with disk storage.
  • Chia is more energy efficient, but requires more storage than other cryptos. Launched earlier this month, Chia is a new digital currency created by Bram Cohen, founder of popular file-download service BitTorrent. The coin claims to offer a more eco-friendly option for investors than crypto leaders Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD). Bitcoin and Ethereum are mined using a technique called “proof of work,” which relies on increased computational power (GPUs). Bitcoin is thought to use more energy than the entire data center industry, according to the Bitcoin Energy Consumption Index. Chia claims to be different. It uses a storage-based system, called “proof of space and time.” The result: Chia does indeed use less electricity, but a lot more storage.
  • Fearing SSD burnout, the Chia demand bump is mostly in HDDs. Chia is technically “green.” But it requires an astonishing amount of storage to farm. The coin passed 1 Exabyte of storage on April 28, and only a few days later it touched the 2 EiB mark. As a result, industry observers have started to worry about burnouts on smaller, lower endurance SSDs. Reports suggest that crypto farming can burn out a 512GB SSD in just 40 days. In response to this new SSD demand wave and the potentially short life-spans of these storage solutions, Chia farmers have shifted their demand to higher end HDD disk storage solutions. Tom’s Hardware is a good source for detailed analysis of recent fluctuations in hard drive prices. The bottom line? Low-end hard drives and SSDs only moderately increased in price, while storage solutions with capacities over 10 terabytes saw their prices jump substantially.

Storage Stocks: How to Get an Edge

  • The green crypto thesis is really a bust. The Chia storage demand spike will likely be short term. Buy WDC over STX on higher retail exposure. There are two reasons why I don’t expect to see the same aggressive demand spikes in HDDs that we saw in the GPU market. First, Chia is still in early stages of proving itself a viable cryptocurrency. Second, Chia, like other “green cryptos,” isn’t green at all. Chia is certainly less compute-intensive than most cryptocurrencies, but it’s still environmentally damaging as it relies on HDDs and SSDs that are used solely for the process of mining the coin. As investors start to understand this differentiation a bit more, the Chia demand craze should abate. Between WDC and STX, WDC should see more of a benefit because it derives a greater portion of sales through retail channels, as opposed to distributors.
  • There are other reasons to like WDC. WDC will likely get a Chia bump this quarter. But there are other reasons to like the stock here. Western’s DRAM and NAND flash memory chips have also turned a corner, with demand ramping.
  • Micron Technology is an important play here. Improving NAND and DRAM demand benefits Micron, which makes both. The company just reported 30% year-over-year growth in its fiscal 2021 second quarter. While MU stock has had an incredible run, gaining almost 74% over the past 12 months, I’d continue to look to accumulate on pullbacks. As the DRAM market continues to suffer from undersupply, MU should see revenue and margin growth accelerate.

Other Tech Stocks to Consider

  • Aerospace and defense players are a more subtle way to play the space. No one thinks of Honeywell as a crypto play, But since last year, the industrial giant has been using blockchain technology to track the sale of its aircraft parts and prevent parts from going missing or being replaced with knockoffs. Blockchain technology in the aerospace and defense market is anticipated to grow at a CAGR of over 35% during 2020-2025. At 19x EBITDA (below its 23x peak), and 3.3% yield, I like this defensive stock (and re-opening play) on the recent pullback. Another important aerospace and defense blockchain player: Microsoft, which uses Bitcoin blockchain to authenticate online IDs. MSFT remains my favorite large-cap tech stock right now.

On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joanna Makris is a Market Analyst at InvestorPlace.com. A strategic thinker and fundamental public equity investor, Joanna leverages over 20 years of experience on Wall Street covering various segments of the Technology, Media, and Telecom sectors at several global investment banks, including Mizuho Securities and Canaccord Genuity.