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Seagate Technology (NASDAQ:STX) is one of the best performing stocks in the market. Over the last year it has increased in value by nearly 200% despite a troubled market and questions surrounding the future demand of hard disk drives (HDDs). The stock is currently trading with a one-month loss of more than 7%, after reaching new highs. However, in the last week it has rallied 6% and was one of the few stocks that traded higher on Tuesday. With that being said, this is a stock that trades in very noticeable trends, and now appears to be trading to new highs. Therefore, as being one of the better performing companies in the market, I am looking at both sides of the trade, and my outlook for the company moving forward.

Bear Perspective

First, before jumping into the positives, let's explore the negatives of STX, as with any investment the downside should always be explored. The stock has been downgraded four times in the last five weeks as analysts see weak PC demand hurting the company. The downgrades led to much of the stock's recent loss, but was fueled as well by comments from Intel (NASDAQ:INTC) when the company's CEO discussed "weak enterprise demand." Analysts believe this weak demand could ultimately affect the high margin server/storage hard drive sales of STX, therefore creating downside in shares of the stock.

In addition to analyst downgrades and Intel's bearish outlook, we've also been given negative outlooks from Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL). Most expect the back-to-school and holiday sales of PCs to be weak as a result of macro conditions and increased growth in the tablet space. These problems are accurate and well-documented, but because of Seagate's valuation and its diversified business, in addition to the size of the HDD space, the company should continue to flourish.

Bull's Perspective

Most likely, PC sales will continue to struggle through this holiday season. Of course we will see some level of increased demand but because of our growing interest in tablets consumers with limited expendable income are electing to purchase the new age technology. However, there is more to STX than just PCs, despite the fact that PCs are a necessary piece of equipment in most developed countries and perform tasks that can not be done on tablets.

STX does not benefit from the high sales/demand of tablets or smart phones; however, it does benefit from the cloud. HDDs are required for the amount of storage that is connected through the "cloud", therefore in a way the growth of smart phones and tablets benefits STX and indirectly creates a new segment of opportunity. In the last month, investors have sold STX due to weak consumer demand. But what investors must have forgotten is that the hard disk drive space is massive and stretches into not only PCs and laptops, but also medical imaging devices, supercomputers, home entertainment, DVRs, game consoles, etc.

Two of the fastest growing segments in this space are "big data" and the "cloud" and there is a major cost advantage for HDDs over solid state disks (SSDs), which are manufactured by companies such as Fusion-IO (NYSE:FIO). The growth of SSDs, flash memory, has also been a point of pessimism for some investors regarding this company. However, Seagate has a very diversified product line of technology that incorporates SSD with HDD and products that give more storage such as SSHD. This particular argument regarding the belief that SSDs will replace HDD somewhat contradicts the arguments made by bears. One of the greatest arguments against STX is that the macro conditions are hurting sales, yet those same people believe SSDs will continue to grow, despite being much more expensive than HDDs, therefore affecting the consumer's wallet in a much more impactful manner.

The strategic decisions of Seagate have been on point for the last year, and although I believe the HDD market is more than large enough to return considerable growth I still anticipate Seagate making a bigger splash in the SSD market. OCZ Technology (NASDAQ:OCZ) is an SSD company trading with a pathetic valuation near 52-week lows and a price/sales of 0.66. OCZ is growing very rapid, but can not return to profitability and has horrible operating cash-flow. In my opinion, if STX wants to enter the SDD market then it could very easily acquire OCZ, which has been speculated, and grow its SSD business at a much faster rate than OCZ can do alone. Or it could even partner with OCZ Technology. Either way, the option remains available, and Seagate could easily outbid Micron (NASDAQ:MU) while barely affecting its balance sheet. Micron, on the other hand, would have to count its pennies to go into a bidding war with Seagate, that is if Seagate wishes to acquire OCZ, a move I support and believe will occur considering the valuation of OCZ.

Valuation

If you look at the two-year chart below you can see that STX is a trendy stock. It has a tendency to hit new highs and then experience profit taking that lead to a 10-15% pullback. This can be seen on three separate occasions over the last year. The stock then finds some level of support and begins its trend higher. Over the last week the stock has begun to trade higher after finding support in the previous week. The remainder of this week will be crucial in determining its trend over the next six months, but either way, if it falls another 6% or trades higher another 10% I believe it is presenting a large amount of value considering its fundamentals.

Chart forSeagate Technology Public Limited Company

Seagate is one of the most shareholder-friendly stocks in the market. The company has a plan to reduce the number of its shares outstanding by 250 million by 2014, and it has already bought back over 100 million shares during the last few years. As a result its EPS shows stronger growth, allowing it to easily meet expectations. This may not be fair, but in a market that only cares about top and bottom line performance, STX is usually a golden ticket.

Most companies either aggressively buyback shares, or pay a solid dividend, STX does both with its 4.06 yield. Despite the market's recent rally there are many investors who are still seeking yield and safety stocks. Seagate has all the characteristics of a safety stock, that just so happens to be a top performer, with a balance sheet that will allow the company to grow and provide the leverage to adapt to any trends within the market. Take a look at the key fundamental metrics of STX, and you'll see its level of value despite a 200% gain over the last year.

Seagate
Market Cap$12.53 B
PEG Ratio0.16
Price/Sales0.83
forward P/E ratio4.77
Profit Margin19.16%
Return on Assets20.27%
Return on Equity96.04%
Cash2.12 B
Debt2.86 B
Current Ratio1.86
Operating Cash Flow3.26 B
Yield4.06

Conclusion

It's natural for bears to be out in full force when a stock trends lower, and that's ok. But STX is doing nothing more than continuing its long-term trend with a period of profit-taking, and now looks to be in the process of reversing. Granted, the worries surrounding the company are real and could affect short-term growth. But at this point no other device has been created to fully replace a PC. Tablets are getting more advanced but are still limited, as tablets are still considered a luxury while computers are a necessity. In addition, HDDs are used in many industries and for multiple purposes. I think that in the next year STX will venture out and expand its presence in SSDs but that margins, execution, and keeping shareholders happy will remain its focus. As of now STX is operating in a space in which it can grow to a larger degree. With a modest valuation, a fallen share price, and a stock that is trading higher, I believe it would make a great long-term investment from its current price and return large gains for many years to come.

Source: Value Of The Week: Seagate Technology