Seagate Stock Analysis: Seagate’s Turnaround Should Gather Pace Soon

namanNaman Shukla is an Analyst at I Know First. He writes and invests in the stock market. Ranked in the top 8 percentile in TipRanks.com. Featured on SeekingAlpha.com, GuruFocus.com, Valuewalk.com among others.

Seagate’s Turnaround Should Gather Pace Soon

Summary

  • Consolidating PC market is a plus point.
  • Advanced product development capabilities should help Seagate outwit its peers.
  • Growing smartphone sales should act as a tailwind for Seagate.
  • The stock looks undervalued and is a buy on the pullback.

The PC market has been on the downtrend for several years and this has put negative pressure on hard disk makers like Seagate Technology (STX). Seagate is currently trading 40% lower than its 52-week high levels. However, several reports show that the PC market may be consolidating, which bodes well for Seagate going forward.

Although the stock is currently trading at 29x trailing earnings, Seagate’s earnings should grow considerably in the future due to the consolidation of the PC market. However, there are several other more important factors mentioned below that can help Seagate perform better in the long run.

Outlook

Seagate Technology announced third quarter ended April 01, 2016 total revenue of $2.65 billion, down 13 percent sequentially from $3.0 billion in second quarter of 2016 and down 21 percent year-over-year from $3.3 billion in third quarter of 2015.

Seagate declared third quarter of 2016 non-GAAP net income of $66 million or $0.22 per diluted share, down 82 percent year-over-year from $357 million or $1.08 per diluted share during the same period last year and down 73 percent sequentially from $246 million or $0.82 per diluted share in second quarter of 2016.

The global hard disk manufacturer reported continued sequential and year-over-year declines in both its top and bottom lines primarily due to the several unmet near-term demand objectives.

Seagate has continued to witness sequential and year-over-year declines in both its top line and net gross margin due to expanding company’s long-term debt profile driven by senior notes having consistently rising rates over the longer term.

Seagate is witnessing notable and expanding Exabyte demand, mainly with the key enterprise applications quickly shifting to cloud platform, despite the fact that the short-term growth outlook of this industry seems challenging.

Seagate Stock Analysis

(Source: Seagate Investor Presentation)

Moving ahead, Seagate is consistently and strategically focused on widening its set of key storage solutions to successfully meet the expanding requirements of the company’s rising worldwide customer base, developing on its robust competitive position while improving its business growth prospects for ongoing strong financial performance. Further, the company is keen on delivering attractive shareholder returns in form of consistently increasing dividends paid per share.

Seagate has consistently reported sequential and year-over-year reductions in both its top and bottom lines mainly due to the growing long-term debt profile of the company, driven by enhanced product development expenditures which are continuing to eat into Seagate’s margins while forcing the company to implement key cost optimization strategies.

Seagate Stock Analysis

(Source: Seagate Investor Presentation)

The enterprise HDDs of Seagate are believed to be a unique standard in high-performance and high-capacity solutions which are primarily developed for a range of core applications, storage modes and workloads to enhance the user’s storage efficiency. The advanced SDD solutions of Seagate are delivering new levels of superior performance with enhanced density, TCO, lowered power consumption, smaller latency and notable speed in data centers.

Seagate is uniquely designing and manufacturing the innovative enterprise system solutions that are highly scalable and high-performance data storage solutions.

The advanced product development capabilities of Seagate by uniquely analyzing the global market needs in the storage technology space is expected to continuously motivate the company to uniquely develop and deliver innovative storage solutions while offering attractive shareholder returns in form of dividends and strategic share repurchases.

Growing Demand

The demand for data storage systems is expected to expand significantly both over the near-term and longer term mainly driven by huge data storage demand from every level of key computing devices available in the market from enterprise servers to smartphones which is leading to this huge data explosion.

According to IDC, the global shipments of “capacity optimized storage” systems between 2013 and 2016 are estimated to grow from approximately 22,000PB during 2013 to slightly below 90,000PB during 2016.

Seagate Stock Analysis

(Source: Extremetech.com)

For a majority of the previous five years, Hitachi and Seagate have delivered the most attractive price-per-gigabyte, with Toshiba DT01ACA and Western Digital Red drives just lately turning feasible. From the above graphs, Hitachi drives have the least 1.4% failure rate. The 3TB drives of Seagate have turned out to be a huge failure, with more than 40% drives failing all through 2014. However, the innovative 4 TB version have recorded the least 2.6% of failure rate, highlighting Seagate’s impressive product development capabilities.

The consistently rising sales of smartphones and handheld devices is expected to drive notable near-term and long-term demand for storage space to handle the exploding data storage requirements, driving sustainable long-term company growth while delivering attractive shareholder returns.

Conclusion

Overall, I think investors should consider buying Seagate on the significant pullback. The company’s superior product development capabilities coupled with the growing demand in the smartphone segment should help Seagate perform better in the long run.

While the company will face some headwinds in the short-term due to its high debt, it should perform nicely in the long run, making the stock a good pick on the pullback.

My bullish stance on Seagate is resonated by I Know First’s algorithmic signals. In the past, I Know First has also been bullish on Seagate as exemplified by their 14-day forecast from July 5th where STX returned an impressive 24.80%.  I Know First uses an advanced state of the art algorithm based on artificial intelligence and machine learning to foresee market performance for more than 3,000 markets including stock forecasts, world indices, commodities, interest rates, ETFs, and currencies.   The algorithm generates a forecast with a signal and a predictability indicator. The signal is the number at the center of the box. The predictability is the figure at the bottom of the box. At the top, a particular asset is identified. This format is standardized across all forecasts. The middle number indicates strength and direction, not a price target or percentage gain/loss. The bottom figure, the predictability, signifies a confidence level.

Seagate Stock Analysis