Seagate Rides The Digital Content Wave

| About: Seagate Technology (STX)
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There has been an explosive growth in digital content in the home and the office - from high-definition video, music, blogs and podcasts, to CAD and other large graphics files, and archived emails.

The growing online video trend and the increasing popularity of YouTube and the likes is a major driving force for the increasing demand for massive amounts of hard drive storage. All the videos that get downloaded or uploaded need to get stored somewhere, right? In this post, I will analyze Seagate as an online video beneficiary.

Seagate Technology (NYSE: STX) is a leader in the design, manufacturing and marketing of rigid disc drives. Based in California, it has 54,000 employees, of which 43,000 employees are located in its Asian operations. It has around 3,857 U.S. patents and 761 foreign patents. Seagate acquired Maxtor in May 2006 and EVault in January 2007. The disc drive industry is undergoing consolidation with TDK acquiring Alps and Western Digital acquiring Komag in 2007.

Seagate produces a wide range of disc drive products that address enterprise, mobile computing, desktop, consumer electronics and branded solutions markets. Most of its products are based on perpendicular recording technology and it has recently announced its plans to introduce solid state drive [SSD] products for select markets. Seagate’s Momentus® 5400 FDE.2 laptop disc drive with built in Advanced Encryption Standard [AES] encryption chip built was in July certified by the National Institute of Standards and Technology [NIST] — a first for any hard drive maker.

On the financial front, Seagate reported revenue of $11.4 billion for fiscal year 2007 that ended on June 29th. This was an increase of 23% over $9.2 billion in fiscal year 2006. The Maxtor acquisition was a major factor in this increase in revenue despite a 9% reduction in the average sales price from $78 to $71 per unit. GAAP net income was $913 million and diluted net income per share was $1.56. HP (NYSE:HPQ) and Dell (DELL) are its major customers accounting for 16% and 9% of consolidated revenue, respectively in fiscal 2007. For Q4 2007, it reported revenue of $2.74 billion, GAAP net income of $541 million, and diluted net income per share of $0.96.

For the September quarter, Seagate expects to earn between $.057 and $0.61 a share, on revenue in a range of $3.15 billion to $3.25 billion. (It had earlier estimated revenue of $2.9 - $3.0 billion, and GAAP diluted net income per share of $0.35 - $0.39.) Its stock is currently trading around $26 and its market cap is $13.79 billion. Seagate will be announcing Q108 results on Oct 16, 2007,

Both the overall storage market and Seagate as a company have a lot of momentum, but the stock seems cheap. The disc drive industry is projected to exceed $30 billion and 550 million units annually by 2008, according to Gartner Research, up from $21.4 billion in 2004. Seagate holds the #1 position in overall market share, and the #1 spot in 3 of the 4 key markets, including Consumer Electronics, Enterprise and Desktop computing.

This is a classic opportunity of simply riding the momentum of a fast growth market on the back of a good company.