Seagate Adds Potential Value With SSD Capabilities

| About: Seagate Technology (STX)


Seagate is acquiring the SSD assets of LSI.

HDD storage is still far cheaper than SSD.

Seagate could return to growth, and a higher P/E.

Reality check: how much does it cost, retail, for a consumer to add 1 Terabyte (TB) of storage with a hard disk drive (HDD) versus an SSD (solid state drive)? Prices vary of course, but a check at shows a Seagate 1 TB SATA HDD for $54.99. The cheapest 1 TB SSD is from Samsung, for $549.99.

Four years after some analysts predicted the end of the HDD, and of Seagate (NASDAQ:STX), it is still ten times as cheap to store data on a hard drive as on an SSD. While the SSD story was not the only factor, STX hit a post-recession low of $9.05 on October 4, 2011. As it became clear the SSD threat was a Chicken-Little story, the stock gradually recovered, hitting a recent 52-week high of $62.76. (52-week low is $37.17).

[Additional disclaimer: I initially invested in STX on June 12, 2012 at $23.13 per share.]

Seagate recently announced it would acquire from Avago (NASDAQ:AVGO) the LSI SSD related businesses, "providing Seagate with established Enterprise PCIe flash and SSD controller capabilities to deliver solutions for the growing flash storage market."

The LSI business is expected to generate $150 million in revenue in fiscal 2015. That is not a lot of revenue for Seagate, but it does provide an edge in the ongoing struggle for data storage market share. HDD competitors Western Digital (NYSE:WDC) and Toshiba's OCZ also compete in the SSD market, which is dominated by Samsung. Other notable players are Crucial/Micron (NASDAQ:MU), Intel (NASDAQ:INTC), SanDisk (SNDK) and Kingston. Seagate had no pure SSD devices available at TigerDirect when I checked, but had one hybrid (SSD + HDD) drive available.

Seagate did not separate out its SSD revenue for the March quarter. It is fair to assume that almost all of its $3.41 billion in revenue was from HDD, with a small portion from hybrid drives. Since hybrid drives can offer most of the speed of SSD with most of the low cost per bit stored of HDDs, I expect hybrids to become a much bigger story going forward.

March quarter revenue was down 3% y/y, so STX is not currently a growth stock. Growth of storage in the cloud has been offset by a decline of storage attached to declining PC units. Seagate claimed 40% of the HDD market in the quarter, with most of the rest belonging to Western Digital and Toshiba. Share varies by quarter, but has tended to be fairly stable.

I believe Seagate could grow again as storage demands intensify. Most tablet users have noted the lack of local storage capability. New ultra-thin, low-power hard drives can solve that problem at an attractive price. However, a more conservative approach would be to assume stagnation for now.

I believe STX still presents an attractive price proposition to investors at the $53.55 closing price on June 3, 2014. The dividend of $0.43. Per quarter that works out to 3.2%. The trailing P/E is under 12, which means an earnings return on investment of over 8%. You can't get that in the bond market. If revenue and earnings start to trend upward due to increased SSD sales, the P/E should also trend upward, giving a boost to the stock price.

The balance sheet is neutral to my view with cash of $2.3 billion offset by long-term debt of $3.5 billion at the end of the quarter. Free cash flow in the quarter was $319 million, of which $140 million was paid out in dividends. An additional $184 million was used to repurchase shares.

I see STX as a relatively safe long-term investment, paying a nice dividend with some further upside potential if it can get traction in the SSD and hybrid drive markets. However, holders of the stock should keep up on data storage technology trends that could change the future prospects of STX and other HDD and SSD players.

Disclosure: I am long STX. 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.

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