Seagate - Lots Of Upside From Here, Buy Now

Summary

• Seagate is a strong buy as we expect the demand-supply dynamic for the HDD industry to be more favorable in 2H22.
• We see the demand for large-cap HDD in the cloud data center to accelerate in 2H22.
• We also see a healthier pricing environment and a more favorable product mix for the large-cap HDD market in the 2H22.
• We believe the decline in demand for its legacy products is now de-risked and expect the decline in this market to moderate further towards 2H22.
• Recent earnings were less than stellar, while STX maneuvers supply chain issues from China's lockdown and outgrows its reliance on Chia crypto.

Sundry Photography/iStock Editorial via Getty Images

Seagate (NASDAQ:STX) is one of the oldest companies in the storage game, and while its age does not give it precedent to be a "buy," its experience, manufacturing prowess and laser focus on large-capacity Hard Disk Drives for enterprise and cloud customers. We recommend investing in Seagate as the channel to invest in the positive momentum and trends in cloud storage.

All Roads lead to "Demand"

Like other semiconductor sectors, the storage game is all about demand and supply dynamics. There is a growing demand for large-capacity storage drives from the cloud data center. We believe Seagate will be able to meet this demand, and it will drive the stock higher on revenue and EPS beats. Hence, STX as a buy.

The storage sector is essentially composed of Hard Disk Drives (HDDs) and Solid-State Drives (SSDs). The former is bulkier and cheaper and is what you'd naturally see in a large desktop, while the latter is faster, smaller and more expensive and you normally see in a notebook. SSDs are cannibalizing markets that HDDs used to dominate, such as PCs. Yet, there is a new demand for HDDs due to their massive capacity, which SSDs lack. The IDC reports that worldwide HDD industry petabyte shipments are expected to increase at an 18.5% CAGR from 2020 until 2025. The average capacity per drive is also forecasted to increase by an even higher 25.5%. This is essential to note because this means HDD will be able to secure more and more data in response to the growing demand, further booming the data market. Based on this, we forecast long-term positive trends in HDD demand and predict that Seagate will be a significant supplier.

STX's role as a major supplier has already radiated through the company's past six earning presentations under the quarterly "mass capacity revenue trend." We can see the growth resulting from HDD-related revenue shown in the graph. In addition, HDD revenue has increased quarterly, despite global supply chain issues, COVID-19 lockdowns in Shanghai, and the general revenue decline reported in the most recent 3Q2022 earnings. As a result, we believe in a strong positive correlation between HDD demand and STX's stock and advise buying at current levels.

Seagate

Who's the first place in the data wars?

Seagate had previously been overexposed to the PC market, which is both volatile and largely making the switch to SSDs. We believe STX is pivoting to supplying high-capacity HDDs as the core driver of its business. In turn, we strongly foresee the business being more stable and predictable than before. Over the past few years, STX has competed closely with Western Digital (WDC) and Toshiba on leadership in data storage. STX is the market leader with a dominant and expanding market share. Seagate's market share increased from about 41% at the end of 1Q2019 to 43% at the end of 1Q2021; a whopping 200 bps share gain.

We expect to see more tailwinds with STX's focus on HDD. We believe Seagate is on its way up because the company is staying focused on its target: HDDs. Despite the growing market for SSD in PC Clients, Seagate is not expanding its SSD business or venturing to open NAND fabs, which is a good thing. The company has an old-fashioned commitment to HDDs, and it is because of this, we believe STX stock is a buy.

Statista

STX has baggage, but it's manageable

STX is not risk-free. The global supply chain issues and China's stringent COVID lockdown rules are shaking up the market, which will take its toll on semis. Seagate also has its baggage. In previous quarters, we were concerned about Seagate's connection to Chia crypto-mining, a cryptocurrency in which mining was based on the amount of hard disk storage. The following graph clearly shows Chia and Seagate are fairly correlated. As illustrated, Chia's mining continues to impact Seagate's stock performance. Our concern was due to Chia's decline and STX's exposure to crypto-mining-related sales. Seagate is working hard to limit its exposure to crypto-mining-related activities. Since then, we believe STX has overcome its reliance on Chia, and we expect this exposure to not play a significant role in future earnings, unlike NVDA and AMD's crypto exposure.

MacroAxis

Stock Performance

Seagate stock had an impressive run. Over the past five years, Seagate stock outperformed Western Digital, its closest competitor in the US. Seagate stock appreciated around 96%, compared to WDC declined 42% over the same period.

However, the stock has declined over the past year. YTD, the stock is down 28%, and over one year, the stock declined 14%. There will be more downs in the near term until HDD demand and supply balance. The pandemic expanded the storage demand for large-capacity HDDs. Data continues to grow exponentially, and we expect this growth to sustain the demand for HDDs post COVID. We expect this demand and STX's limited Chia crypto-mining exposure will help the stock turn positive later this year. We predict Seagate stock to be driven higher from the current levels. The following charts illustrate Seagate's stock performance.

YCharts

YCharts

YCharts

Valuation

By all metrics, Seagate is a cheap stock. Seagate is currently trading at 7.9x C2023 EPS of $10.32. The peer group is trading at 14.5x C2023 EPS. On an EV/Sales, STX is trading 1.7x C2023 sales versus the peer group average of 4.4x. On a growth-adjusted basis, STX is trading at 0.3x versus the peer group trading at 0.7x. STX is both a growth and value pick. We expect STX to outperform its peer group stocks in the coming quarters. Therefore, we recommend investors buy the stock now. The following chart illustrates Seagate's valuation relative to its peer group.

Refinitiv

Word on Wall Street

Out of the twenty-seven analysts covering the stock, about twelve (44%) are buy-rated, fourteen (52%) are hold rated and one analyst is sell-rated. The ratings show that sentiment is fairly balanced, and we expect this to improve as the company continues executing its business.

Seagate is currently trading at around $81. The median price target is $107 and mean price target is $106, for a potential upside of around 30%. The following chart indicates the sell-side ratings and price targets.

Refinitiv

What to do with the Stock

Despite revenue declines in the 3Q22, we are bullish on the stock. We foresee attractive prospects for the large-cap HDD market in the 2H22. STX's shares are trading up post recent earnings. The bottom line is that the demand for the disk drives from cloud-computing customers outweighs any headwinds Seagate or the market is facing. As a result, we recommend investors buy the stock at current levels.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in STX over 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.

Comments

[farmed out]

Very good total return stock; underpriced and a good dividend while you wait.

[penguinn]

STX is also dishing out 70 cents per share every quarter in dividend. That's $2.80 a year and at $81, its about ~3.5% yield. That's pretty good for a company that is growing as well. They are also returning back to investors by buying back shares every quarter.