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Summary

  • Seagate’s revenue and earnings are declining, but Western Digital posted robust growth in the previous quarter.
  • Weakness in the cloud business is not a good sign for Seagate.
  • A head-to-head comparison between Seagate and Western Digital shows the latter to be a better investment option.

Storage company Seagate Technology's (NASDAQ:STX) shares have fallen from grace after a terrific run in 2013. As sales of PCs slow down and competition from Western Digital (NASDAQ:WDC) rises, Seagate is having a tough time impressing investors. Its revenue is declining and earnings are also moving south now. Hence, should investors consider dumping Seagate and look at a better option such as Western Digital? Let's check.

Weakness in the business

Seagate's growth in the cloud storage business is slowing down, and this was the reason behind the company's weak performance. Seagate is also seeing an increase in expenses in areas such as products for mobile devices and servers, plus declining sales of personal computers that use its products are another headwind.

However, Seagate is strategically investing in its product portfolio and enhance its vertically-integrated manufacturing capabilities to effectively capitalize on the cloud, mobile, and open source storage trends that are being fueled by data growth. Strong cash flow, combined with the execution of capital allocation strategy, reflects that Seagate is on the right track of its goal of returning 70% of its operating cash flow to shareholders this fiscal year.

But then, the fall in sales of personal computers has negatively affected the revenue of Seagate. Global PC shipments fell 10% last year. A shift in consumer focus from personal computers to smartphones and hand held devices has resulted in huge losses for Seagate. However, the company's management states that Seagate has benefited as people buy portable disk drives to back up data stored on tablets and smartphones. Hence, it is advisable for investors to think twice before investing in the stock.

Looking ahead, Seagate is planning to buy fellow data-storage company Xyratex for about $374 million to expand its business in enterprise data storage systems. The acquisition is expected to add between $500 million and $600 million to Seagate's revenue in 2015. In addition, Seagate is tapping into the growing demand for products that help store data in the cloud and is reducing its dependence on personal computer hard drives as consumers shift to smartphones and tablets.

Comparing with Western Digital

But, investors should note that Seagate's rival Western Digital reported a better-than-expected quarterly profit, driven by sales of higher-margin data storage products. Seagate posted a 3% year-over-year decline in drive unit shipments to 56.6 million, or 40% of the addressable market. In comparison, Western Digital's revenue was up in the previous quarter on a year-over-year basis while earnings jumped an impressive 28%. Moreover, if we compare the stats of both companies, Western Digital comes out on top.

Parameter

Seagate

Western Digital

Revenue (TTM)

$13.97 billion

$15.27 billion

Revenue Per Share

$39.63

$64.42

Quarterly Revenue Growth (y-o-y)

-3.80%

3.90%

Gross Profit

$3.94 billion

$4.36 billion

Diluted EPS

$4.44

$4.32

Quarterly Earnings Growth (y-o-y)

-13.00%

28.40%

Book Value Per Share

$7.60

$36.20

Operating Cash Flow

$2.61 billion

$2.82 billion

Source: Yahoo! Finance

Referring to the above table, we come to a conclusion that Western Digital is pretty impressive on the charts. The company is posting growth on both revenue and earnings, and this could benefit investors in the long run.

Conclusion

Seagate is under pressure due to weakness in its cloud business and the slowdown in the PC market. Also, from an investment perspective, we see that it is not a better buy than Western Digital. So, investors should consider selling Seagate and instead invest in Western Digital.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Should You Dump Seagate And Buy Western Digital?