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Seagate Technology (NASDAQ:STX) has enjoyed a slew of bullish analysis from Seeking Alpha contributors in the past couple of months (I, II, III). Although the stock does trade at an exceptionally cheap valuation (forward P/E of 4.65), and has raised its dividend 78% in the past year, there is a major issue bulls are overlooking. The Solid State Drive (SSD) market is rapidly developing into a commoditized business.

Seagate saw ridiculous EPS growth from its FY 2011 to FY 2012 (451%, $1.18 vs. $6.50). This has no doubt been the main catalyst for the stock's 185% run in the past 12 months. This growth cannot be sustained, and earnings will have a hard time staying above $5 per share longer than the next 2 years.

In Seagate's FY 2012 Q4 (June Quarter), EPS declined from Q3, marking the start of a permanent downward trend. In Q4, Seagate missed analyst estimates by $0.10 (of $2.51) and reported earnings of $2.41, a decline of 8.7% (quarter over quarter). The reason for the miss was the "industry's faster recovery from the supply chain disruption" (read the Q4 report here). This faster-than-expected recovery from the Thailand flooding is beginning to cause downward pricing pressure on the entire SSD market already.

Seagate's biggest competitor Western Digital (NASDAQ:WDC) took back market share in Q2 and caused significant pressure on Seagate's margins. Seagate's margins fell from 37% to 33% in the quarter, but remain artificially elevated from pre-flood levels of ~19%. There is still a great deal of room for margins to erode. But don't think that pre-flood levels of 19% are the norm. When the SSD market finally bounces back, both Western Digital and Seagate will experience some of the worst margins in company history. This is due to the commoditized nature of SSDs.

SSDs are rapidly becoming more efficient for cheaper, and suppliers are having to charge less for better performing products. This is great news for consumers looking for more storage, but bad news for the companies making SSDs (Seagate and Western Digital).

In the FY Q4 conference call, management highlighted the fact that margins will continue to fall (to 30% from 33%) through at least the next quarter. EPS estimates for Seagate's next quarter now stand at $2.03 (down from $2.82 just 90 days ago), a decrease of 15.8% from FY Q4. As future earnings estimates continue to decline, it's becoming clearer that analysts exaggerated the impact of the Thailand flooding, and pricing pressure is unfolding faster than previously anticipated.

What makes the situation even more intriguing is the massive insider/institutional selling of late. In the past 6 months, insiders have sold 6.7 million shares, representing about $200 million and 12% of their total holdings. But that's nothing compared to the amount institutions dumped in the past quarter. From Q1-Q2 (Seagate's FY Q3-Q4), institutions reduced their holdings by 46% and sold over 92 million shares. That's good enough for ~$2.5 billion and almost 20% of the entire company.

Ironically, as insiders and institutions dump shares, the company has been buying them back at an unprecedented rate. In FY Q4, Seagate bought back $1.2 billion worth of stock, or 45 million shares (representing 86% of cash from operations). Although in the short term this increases the value of the company's common stock, it makes little to no sense.

Other than artificially inflating a company's EPS numbers (providing 'shareholder value' is what management says), buying back shares doesn't help Seagate's core business at all. A tech company in an increasingly crowded marketplace (that's losing market share) shouldn't be spending 3.5x as much on share buybacks as on research and development ($1.2 billion vs. $269 million).

Conclusion

Seagate's massive push to increase shareholder value through dividends and share buybacks makes recent insider/institution actions inexplicable. This comes conveniently timed with a massive (but temporary) spike in earnings, which has been artificially inflated by share repurchases. Something just doesn't add up.

The commoditized nature of SSDs is starting to show an impact on Seagate's bottom line (margin drop from 37% to 33% qoq), and the decline in profits is beginning to accelerate faster than expected. After the stock's 185%, 1-year run, I believe shares aren't pricing in the impending decline of SSD prices and the consequentially devastating effect it has on Seagate's future margins.

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.