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Seagate Technology (STX), one of the worldwide leaders in storage solutions, is facing headwinds due to declining personal computer sales. On October 28, the company reported its first quarter result for fiscal year 2014, where its net income slipped to $427 million, declining 27% year over year. Revenue also slipped 6% year over year to $3.49 billion. For the next quarter, the company is expecting revenue around $3.60 billion, which is less than the consensus of $3.64 billion. Due to PC's declining sales, the company is now concentrating on products for cloud storage firms and hard drives other than PC.

Kinetic: the company's new breakthrough is paying off

Global spending on data centers is estimated to reach $143 billion by the end of this year, and it may rise to $149 billion by the end of 2014. Also, enterprises are concentrating on cloud infrastructure instead of traditional hardware based storage because it reduces their physical space requirement. To capture this emerging market, on October 22, Seagate introduced Kinetic, an Ethernet enabled open storage platform.

Kinetic will simplify data management and can reduce total cost of ownership, or TCO, of cloud computing infrastructure by 50%. Current data centers have multiple layers of software and hardware stacked together between an application and storage device. The Kinetic platform will remove these layers of hardware, and the application can directly interact with the storage device. It will help cloud service providers and independent software vendors reduce their expenses associated with acquisition, deployment, and support of storage infrastructures. It will also reduce power and cooling cost.

For Kinetic deployment, Seagate has partnered with two open source companies, Basho Technologies and SwiftStack. Basho, which deals in distributed systems and cloud storage software, is in collaboration with Seagate for Kinetic platform's development stage. It has developed drivers for Kinetic, making it compatible for clients who use its product, "Riak," as their storage system. More than one thousand companies use Riak; these include over 25% of Fortune 50 companies, which provide huge growth potential for Kinetic. SwiftStack, which builds cloud storage solutions for applications, has also collaborated with Seagate. Like Basho, it has also made its storage system compatible with Seagate's Kinetic platform.

Other than these two companies, many big companies like Yahoo, Dell, Huawei, Hyve Solutions, Rackspace, and Newisys also have either started using Kinetic or have shown a positive outlook towards it and have publicly stated that Seagate's Kinetic is beneficial because it will help them expand their cloud storage operations as well as reduce their expenses. I am optimistic that these companies will also deploy Kinetic, which will help Seagate generate good revenue in the coming quarters.

Peer Comparison

Seagate and Western Digital (WDC) have been competing with each other in data storage services for decades, but currently both are facing headwinds due to the weakening PC demand. Western Digital has also shifted its focus from PC and is now concentrating on products for cloud storage firms. To strengthen its cloud storage business, Western Digital acquired Virident Systems on October 17. It is a server-side flash storage provider for virtualization and cloud computing. Western Digital will integrate Virident with its wholly own subsidiary HGST. This acquisition will help HGST deliver better storage solutions to its enterprise customers. On the other hand, Virident is Seagate's important technology partner, and in January this year, Seagate invested $40 million in it to provide flash-based PCI solutions to its enterprise customers. Virident's acquisition by Western Digital can impact this relationship, and Seagate doesn't have another vendor for PCI solutions. This could negatively impact Seagate's enterprise business, which constitutes 39% of its gross profit.

SanDisk (SNDK), the global leader in flash-based storage, is also giving stiff competition to Seagate and Western Digital. In July 2013, it invested in Panzura, which provides flash drive-based network attached storage, or NAS, solutions to enterprise companies to store data in the cloud. NAS solution will help SanDisk's customers reduce their administration, power, and cooling costs. With this investment, SanDisk can utilize growing opportunities in enterprise storage, as Panzura's NAS has various advantages over traditional NAS solutions.

Company is financially strong

Although Seagate's income has declined year over year, the company still has stable financial health. Its debt to equity ratio is 0.7539. Additionally, the company's interest expenses haven't increased over last year. This shows Seagate isn't looking for external financing. The company's cash and cashequivalents are also increasing quarter over quarter. As the company's Kinetic storage platform's demand is increasing, its liquidity will further improve.

Seagate has planned to payout 70% of its annual operating cash flow in the form of dividend or share repurchases in fiscal year 2014. In the last quarter, the company repurchased 33 million of its outstanding shares worth $1.5 billion. The company also increased its quarterly dividend to $0.43.

If I compare the forward P/E of these three companies, Seagate is better placed, and its EV/EBITDA is also better than SanDisk. Hence, Seagate is reasonably valued with respect to its competitors.

Valuation MeasuresSeagateWestern DigitalSanDisk
Forward P/E8.129.0412.08
EV/EBITDA5.754.807.57

Considering all above factors, I would recommend shareholders to enter this stock, as these levels still look lucrative.

Source: How Seagate Is Offsetting PC Decline