Why We Revised Our Price Estimate For Seagate To $39

February 29th, 2016 by Trefis Team
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Seagate Technology

We recently revised our price estimate for Seagate (NASDAQ:STX) from $45 to $39. The primary reasons for the price estimate revision were lower revenue expectations due to subdued demand for most product streams for Seagate, which will negatively impact the company’s margins and earnings going forward. In its fiscal second quarter earnings call in January, Seagate’s management provided weak FY’16 guidance for revenues as well as margins. For the fiscal third quarter ending March 2016, the company expects revenues to be about 20% lower on a y-o-y basis – a trend consistent with the last couple of quarters. [1] Similarly, Seagate reported compressed margins over the last couple of quarters owing to price declines and significantly lower demand for PC storage.

STX_Revise1In response to lower expected revenue and gross margins, Seagate’s management intends to cut down the company’s sales, general and administrative (SG&A) expenses. On the other hand, Seagate’s research and development (R&D) are unlikely to fall significantly due to the company’s focus on new technology such as HAMR drives, SMR drives, helium-filled hard drives and its long-term target of bringing 20TB drives in the market by 2020. As a result, a fall in cash operating expenses is unlikely to offset the decline in profits due to which we forecast both SG&A and R&D expenses as a percentage of gross profits to rise.

STX_Revise2

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to  Our Full Analysis For Seagate.
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Notes:
  1. Seagate Q2 FY 2016 Earnings Call Transcript, Seeking Alpha, January 2016 [↩]