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Seagate: Looking For The Bottom

JP Research profile picture
JP Research


  • Seagate’s revenue results were in line, but EPS beat consensus estimates.
  • The EPS beat was driven by higher-than-expected gross margins, lower operating expenses, and lower interest and other expenses.
  • However, the shift from HDDs to SSDs poses a threat to Seagate, which generates over 90% of its revenues from the sales of HDDs.
  • But the stock has already de-rated and now trades cheaply at ~8x P/E, while offering a dividend yield of 6%.
  • We think the market is excessively bearish on the stock, and any surprises to the upside could lead to a short squeeze.

While Seagate Technologies (NASDAQ:STX) did post a better-than-expected quarter this time around, challenges remain. The company has been a clear beneficiary of accelerating data storage growth as enterprises adopt new technologies such as AI, IoT, and Automation, but margin recovery remains a key challenge. We see plenty of headwinds near term, e.g., cloud slowdown, Intel CPU shortages, and macro uncertainty - all of which should weigh on the top line going forward.

We see the company reaching the lower end of its 29-33% gross margins target range, but a sooner-than-expected cloud demand recovery could bring GMs to the mid-point of the range. We think the key to the Seagate story in 2019 will be how management navigates margins, as tight discipline will be required to keep operating costs within the 13-15% OpEx target range.

But there is a silver lining in the Seagate story - valuation. At current levels, Seagate is priced at ~8x trailing P/E, ~6x EV/ EBITDA, with a dividend yield of ~6% to boot. Thus, we think the stock might be worth a look for income investors, as HDD revenue has turned out a lot more stable than many had initially anticipated. Plus, with sentiment already very bearish on the stock (short interest is at ~11% of float), the bar is low, and we think Seagate might be ripe for a squeeze.


Seagate reported revenues of $2,715 million, which were down 9% qoq and in line with consensus estimates. HDD revenues were $2,490 million, which were below estimates of $2,547 million. HDD unit shipments were 36-37 million and below consensus estimates of 37.9 million. Enterprise units sold of 8.1 million were above consensus estimates of 7.9 million. Flash and Enterprise Systems revenue was $225 million, above estimates of $190 million. Seagate shipped 87.4 exabytes this quarter in terms of storage capacity, which

This article was written by

JP Research profile picture
A passionately curious analyst.

Analyst’s Disclosure: I/we 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.

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