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Investment Overview for Seagate (NYSE:STX)
Seagate is a leading provider of electronic data storage products such as hard disk drives for personal storage and enterprise applications. Its main products are hard disk drives or HDDs. Disk drives are the principal medium of mass data storage and they store digitally encoded data on rapidly rotating disks with magnetic surfaces. The popularity and sales of disk drives are driven by performance attributes such as quality, cost effectiveness and energy efficiency. Over the last couple of years, solid state drives (SSDs) have been gaining popularity. These drives do not contain mechanical or rotating parts, thereby consuming less power and not prone to failure as traditional hard disk drives. Seagate manufactures electronic data storage products addressing a broad spectrum of clients such as enterprise applications, client compute applications and client non-compute applications.
In the enterprise application market, its products are designed for servers, mainframes and workstations. The client compute application products are designed for desktop and notebook computers, to be used as primary storage in these devices and Seagate supplies to manufacturers of these laptop computers. In the client non-compute application product line, products are designed for a wide variety of personal and end user devices such as digital video recorders, gaming consoles, personal data backup systems, portable external storage systems, network attached storage and digital media systems.
A majority of its revenues can be attributed to supplying storage for OEM's such as Dell and HP. In fiscal years 2015, 2014, 2013 and 2012, Dell Inc. accounted for approximately 14%, 13%, 13% and 15% of consolidated revenue, respectively, while Hewlett-Packard Company accounted for approximately 12%, 13%, 10% and 14% of consolidated revenue, respectively.
It also provides data storage services for SME's which include online backup, data protection and recovery solutions.
Enterprise Storage Unit Sales
We estimate that the enterprise and cloud storage business of Seagate, driven by a robust growth in the cloud computing industry will become the most valuable division by the end of our forecast period.
Flash-based Enterprise Storage Helps Margins
Flash-based storage has higher margins than traditional HDDs. Seagate has recently acquired Avago Technologies-owned LSI's flash business to enhance its flash portfolio. Flash-based products are priced higher than traditional storage platforms on a cost-per-GB basis, while commanding higher margins.
The high growth of digital content is driving the need for higher storage capacity to store, aggregate, host, distribute, manage, backup and use digital content. The need to access rich data and content is being driven by a highly mobile and increasingly connected user base. The traditional enterprise and client compute markets will continue to demand high capacity storage solutions and will be best served by hard disk drives where manufacturers compete on the ability to deliver cost effective, reliable and energy efficient mass storage devices. The increasing demand for HD content for media consumption and rich formats such as HD DVD and Blu-Ray drives the demand for high capacity disk drives solutions in the end-user market.
The need for storing data locally is counteracted by the growing presence of cloud-based storage, which eliminated the need to backup data or fear losing data. Moreover it is universally accessible, which makes it a lucrative option. Consequently, large data centers are growing in numbers and the need to store data locally (on embedded hard drives or external disks) is reducing.
In early October 2011, flooding in Bangkok, Thailand caused many manufacturing industrial parks to shut down operations . Factories supporting the HDD industry's supply chain were concentrated within these industrial parks to reduce costs and improve logistics and during this temporary suspension of operations, demand exceeded supply leading to high prices in HDD's, increasing the industry's average selling price per unit. Seagate's ASP for hard disks, surged from $55 in the third quarter to $68 in the fourth quarter of 2011 due to the Thailand floods. Seagate's ASP was $67 in 2012. The industry has recovered since the flooding and the prices stabilized to about $63 in 2013 and 2014. ASP fell to about $60 per drive in 2015. We expect that the prices could continue to fall price per GB of storage goes down.
Shift From Hard Disk Drives To Solid State Drives
All leading laptop manufacturers are now offering laptops with a hybrid HDD-SSD primary memory and high-end high-performance laptops with complete SSD memory. Solid state drives are much more expensive per GB and this is the primary reason for the slow adoption of SSD as the primary memory component. As production capacity increases and technology changes leads to a drop in SSD prices, we can expect that solid state drives will become a standard for notebooks and netbooks.
Massive slowdown in PC market
PC market witnessed a slowdown in late 2014 and through 2015 due to the anticipated release of Windows 10 in mid 2015. As a result of low desktop and notebook sales, shipments of hard drives for PC and laptops suffered through 2015. Sales are likely to pick up from 2016.
Growth In Cloud Computing And Remote Storage Services
We expect Seagate's enterprise business to be driven by businesses deploying cloud computing environments in an effort to pool resources and cut costs. Remote storage is becoming a standard for most enterprises and has even gained traction with retail customers with services like Dropbox, Skydrive and Google Drive.
To achieve the high performance needed with cloud computing, we can expect the hybrid SSD-HDD enterprise storage drives to become popular in the future.
The storage industry as a whole is going through a phase of consolidation, as companies are unable to keep up with the constant need to improve manufacturing efficiency, the capital required for R&D and staying ahead of changing trends such as the shift to SSD.
Seagate acquired Samsung Electronics's hard disk drive business in December of 2011, and Western Digital purchased Viviti Technologies Ltd. (formerly Hitachi Global Storage Technologies) in March of 2012. Western Digital then acquired Virident, sTec and Velobit in 2013 to enhance its flash portfolio. SanDisk acquired PCIe storage maker Fusion-io in 2014 and Seagate acquire the PCIe flash business of Avago-owned LSI. We expect further consolidation as bigger players buy out small and niche players to obtain market share and more importantly gain access to research in the areas of high speed flash storage and solid state drive technology.
Below are key drivers of Seagates's value that present opportunities for upside or downside to the current Trefis price estimate for Seagate:
- Enterprise and Cloud Units Sold: The enterprise storage division has grown significantly in the last few years, with the number of units sold growing at a CAGR of over 10% form 2009 through 2013. However, growth has slowed down to about 2-3% through 2014 and 2015. We estimate that Seagate's enterprise and cloud storage business, driven by robust growth in the cloud computing and enterprise storage industry, will become the most valuable division by the end of our forecast period. The price per unit of enterprise storage units is estimated to rise from $128 per unit in 2015 to over $140 per unit as flash-based storage gains traction. We estimate the number of units sold by this division to increase to about 45 million units from 33 million units in 2015. If the units sold rise to over 55 million units through the end of our forecast period, we can expect a potential upside of about 10% to the current price estimate
- Consumer Electronics and External Storage Units Sold: Consumer electronics storage business includes embedded storage for TV, DVRs, gaming consoles and other media devices has grown significantly in the last few years. The number of units sold in the consumer electronics and external storage combined have grown at a CAGR of over 10% from 2009 to reach 47 million units sold in 2013. Subsequently, units shipped declined to under 44 million units in 2015. We estimate the units sold in this division to grow more moderately at a CAGR of 2-3% through the end of our forecast period to reach over 50 million units. The price per unit sold is estimated to fall from its current level of about $60 per unit sold to about $57 per unit sold as cost per GB falls in the near term. If enterprise and cloud-based storage gains more popularity than anticipated, and starts cannibalizing the consumer electronics market, the growth rate of consumer electronics and personal storage products could slow down even further.
We can expect a potential downside of about 5% to the current price estimate if the number of units sold by the consumer electronics and external storage division is less than 45 million units by the end of our forecast period while the prices remain more or less constant.
- Pricing of Laptop HDD Units Sold: The laptop and mobile storage business has grown moderately in the early part of the decade, with 60-80 million units sold per year on an average. Seagate sold over 80 million units in 2012 due to the pent up demand for storage products post-2011 Thailand floods. We estimate that Seagate's HDD units gradually decline to about 55 million units through the end of our forecast period. The price per unit sold is estimated to rise from its current level of about $50 per unit sold to about $55 per unit sold as the mix of high-priced SSD and hybrid drives increases. Despite the decline in cost per GB, there is an increase in average capacity per drive. We can expect a potential downside of about 5% to the current price estimate, if the average price per unit of laptop units declines to about $45 per unit while the units sold remain more or less constant.
For additional details, select a driver above or select a division from the interactive Trefis split for Seagate at the top of the page.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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