Seagate Concerns Are Overblown

| About: Seagate Technology (STX)
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Seagate's (NASDAQ:STX) fiscal 3rd quarter ending March 30th, 2012, driven by a massive 33% jump in average selling prices, resulted in net revenues jumping 65% to $4.4 Bn and EPS climbing to $2.48 per share.

Kevin Quon wrote well about how Seagate is undervalued and in spite of the trend towards cloud computing, it still has a lot of potential. I completely agree.

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I too believe that Seagate will not be swept away by the cloud. Seagate's blow out third quarter wasn't entirely about the massive price hike caused by flooding in Thailand. Seagate actually had organic growth of 2.5% in the nine months ended March 2012 and 8% in the same quarter even as production emerged from flood ravaged Thailand. Samsung's (OTC:SSNLF) HDD unit which was acquired in Q3-12 added 13% more.

The trends toward mobile computing and cloud storage reduce the number of gigabytes per hard drive - this affects prices but does not reduce the number of units. Unless desktop and notebook sales fall off a cliff, the number of units sold is not going decrease dramatically. Seagate is addressing the fall out on pricing. PC shipments, which were earlier expected to stay flat in 2012, actually grew 1.9% in the first quarter of 2012 and are likely to grow 4.4% in calendar 2012, according to Gartner.

The biggest shift to cloud storage was in Seagate's enterprise segment which saw reduced demand in the first nine months of fiscal 2012. However, Seagate's Enterprise segment is only 13% of total sales and weakness in this segment hardly impacted the bottom line.

There are other concerns which over the next few years will drag margins down from the current highs - the Samsung acquisition, which is skewed towards Notebooks, will lead to a downward shift in pricing as OEMS up take a larger share of production, instead of wholesale distributors. Margins should fall to a more sedate 34.5% in fiscal 2013 instead of last quarter's 37%.

There are only two other large players, Western Digital (NYSE:WDC) and Toshiba (OTCPK:TOSBF) left in this industry, with Seagate getting 43% market share - most of the capital investment is going towards cloud storage, capacity addition is not a threat; And as Seagate's CEO pointed out, storage for cloud servers will also require hard disk drives; the need for storage cannot be filled alone by solid state drives.

Average analyst estimates call for earnings of 7.10 in fiscal 2012 and $ 9.42 in 2013, some of it buoyed by the massive share buybacks and hefty dividend. Seagate throws up gobs of cash and is using a lot it to reduce share count.

I think Seagate's demise is grossly exaggerated and it remains undervalued at a forward P/E of 4.3.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.