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If you look at a long-term price chart for Seagate Technologies (NASDAQ:STX), you will see a swoon in 2008 corresponding to the sell-off at the beginning of the Great Recession. You could buy STX in early 2009, for as little as $3.38 per share. After climbing up above $20 per share in early 2010, there was a second swoon to near $10 per share. This was based on the idea that a new technology, solid state drives [SSD] would wipe out all traditional hard disk drive [HDD] makers, including Seagate and its main rival Western Digital (NASDAQ:WDC).

There are still people who hold to that thesis, even though years have gone by and HDDs are still manufactured and used in high volumes. As recognition of reality began to bull around the SSD hypothesis shares in Seagate recovered. Right now we are in a pullback, with Seagate near $40 in the first few days of August, after hitting a 52-week high of $47.82 on July 22, 2013.

I believe that the amount of data being saved is continuing to see explosive growth and that Seagate is positioning itself to be competitive not just in HDD, but in SDD and in hybrid SDD-HDD drives as well. STX pays a dividend of $0.38 per quarter, giving it a 3.7% yield at $40 per share. Its P/E ratio is 8.4, meaning earnings are 11.9%. Even in stasis Seagate would be a good investment compared to government bonds.

I believe Seagate has significant growth potential. Typically when a company shows growth its P/E ratio rises. If Seagate can show sufficient growth in 2014, to get its P/E ration to 16.8, the share price will have doubled. Typically P/Es between 15 and 20 reflect only moderate growth.

I'll use the latest quarter, Seagate's fiscal Q4 2013, to establish a baseline before analyzing future trends. As reported on July 24, June quarter revenue was $3.42 billion, down 3% sequentially from $3.53 billion, and down 24% from $4.48 billion in the year-earlier quarter. All other things being equal, I would argue that a 24% year/year decrease in revenue should correspond to a low P/E ratio. But revenue back in the June quarter of 2012 was up 57% from the June quarter of 2011. It was artificially inflated by the rebound from the disruption of the industry when the drive (and parts) manufacturing plants in Thailand were disrupted for months by flooding.

Earnings followed a similar pattern. On a diluted GAAP basis, they were $0.94, down 13% sequentially and down 60% from the June 2012 quarter. On a non-GAAP basis, EPS was $1.20.

Guidance for the current, September quarter is revenue between $3.5 and $3.6 billion, which appears to be a sequential increase due to normal seasonality. While data storage is a year-round industry, there is increased demand during the back-to-school and holiday shopping seasons.

You can pretty much take away the thesis that SSD replacing HDD will ruin Seagate. In May Seagate launched its first client SSDs and its next generation of enterprise SSDs. While Seagate does not dominate the SSD market, it certainly has the resources to do that over time. Operating cash flow in the quarter was $394 million and investment in R&D was $294 million. The main competitive threat, over time, is likely to be Samsung, which has even vaster financial resources and is one of the manufacturers of the NAND flash memory chips that makes SSDs possible.

Whether Seagate, Samsung, Western Digital or a pure SSD play comes to dominate in the long run may depend on who wins in hybrid drives. Hybrid drives offer the low cost-per-bit of data stored on HDD, while offering much of the speed advantage of SSD. In a boot drive scenario, for storing data that is constantly used, like operating systems and application programs, SSD offers advantages that are worth the price. For accessing less used data, say a database, a hybrid can be a better fit.

Seagate has advantages (along with WDC) in the hybrid drive market. The SSD, or flash memory, component of a hybrid can be relatively small. For an SSD maker to compete in hybrids would require them to buy HDD components from Seagate, Western Digital, or another supplier, or to go to great expense to set up their own HDD plants. Engineering a small SSD component for a hybrid has not been difficult for Seagate and does not involve any major retooling beyond a new printed circuit board populated with the NAND memory and a hybrid memory controller.

Improvements in HDDs are also making them more competitive in an arena where it has been assumed that SSD would dominate. Seagate is now making HDDs just 7mm thick, with 5 mm drives beginning to be shipped this quarter. For tablet computers a 5 mm drive can offer either more storage than an SDD at the same price point, or the same storage at a lesser price point. The 7 mm HDDs are mainly going into thin and light notebook computers. These computers command a premium right now, but they should be coming down in price and increasing in units shipped over the next two years.

It is quite possible, when you look at all these moving parts, to conclude that the technology trends will actually favor Seagate as long as it can use its position in the HDD market to dominate hybrids and then the SSD market. The main risks that could dampen the upside are from competition with Western Digital and Samsung, or perhaps one or more of the pure SSD players. Another risk would be if the annual increase in the rate of data storage took a pause.

So I see Seagate as having a fairly strong bottom and plenty of upside potential. If things work out along the main probability line I foresee, by the end of 2014 STX should be at $80 per share, but there is a wide margin of error in this model.

Source: Seagate Offers Dividend And Potential 2x Upside

Additional disclosure: I am also long MRVL, which supplies drive controllers to both STX and WDC