Seagate: Looking Pretty Solid

| About: Seagate Technology (STX)

I recently picked up shares of Seagate Technology (NASDAQ:STX) on the dip. In Seagate Set To Shine, I analyzed the fundamental thesis for investing in the stock: dirt-cheap valuation, strong growth, and an awesome dividend.

The reason Seagate is trading at such a cheap P/E multiple is that many investors view it as another "old tech" company. After all, in today's era of tablets and mobile computing, who wants a hard drive?

That argument is flawed, as I examined in Dell: Old Tech Giant With 30% Upside. While the sales numbers for personal computers (and consequently hard drives) may no doubt decrease as "mobile" computing becomes the norm, the rise of cloud computing inherently necessitates better (and more) data storage. Many "old tech" companies have quietly been prepping this infrastructure while the "new tech" companies get all the attention with the flashy tablets. But remember, without data storage, the cloud computing that these tablets rely on won't work. Companies investing in the infrastructure will see rewards, and Seagate got serious about this last year with their Pulsar SSD line of data storage drives. As explained by Kurt Richarz, Seagate's EVP of Product Line Management:

The surge in storage consumption is being driven not only by the growth of content and use within the enterprise, but also by new applications and devices that directly or indirectly consume enterprise storage. Seagate's new family of enterprise storage solutions meets the diverse storage needs of these high growth application environments, whether it's fast transactional database servers, bulk storage and archiving, or everything in between.

New Developments

Two new developments spell success for Seagate.

The first is Seagate's recent inclusion in the S&P 500. Due to an acquisition of Progress Energy by Duke Energy, a spot was open, and that spot was given to Seagate. Shares of Seagate jumped on the news. Why? The fundamentals of the company obviously didn't change overnight. The answer is psychological: being included in a prestigious index like the S&P 500 is somewhat akin to being nominated for an Academy Award -- it's "recognition" of your status. Many people who focus exclusively or primarily on "big-index" stocks (Dow, Nasdaq, S&P) will now be giving Seagate a closer look. Seagate may also experience a short-term boost as it is bought up by the various index funds like SPY that track the performance of the index.

The second development is Seagate's acquisition of DensBits Technologies. The one area where Seagate has been lagging behind its sole major competitor WesternDigital is in the consumer Solid State Drive sector. (While Seagate's Pulsar is based on SSD technology, the Pulsar is designed for commercial data servers -- not consumer computers.) The acquisition of DensBits will help Seagate continue to develop low-cost technology in both consumer and enterprise SSDs. One of the reasons Seagate acquired DensBits was for their controller technology:

DensBits, located in Israel, has a controller technology called Memory Modem that enables reliable data transfers to NAND flash storage. Memory Modem includes error-correction and data management features at the controller layer to ensure smooth and quick data transfers. The error-correction features include Error Correction Code (NYSE:ECC), which is also used in some DRAM modules and microprocessors to reduce data corruption.


Seagate is very attractively valued right now, especially given their potential for explosive growth. They've caught the attention of well--regarded hedge fund manager David Einhorn, who owns over 5.4% of the company's shares. There's a lot of reason to be very bullish about Seagate's future.

Disclosure: I am long STX.

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