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Investment Overview for Seagate (NYSE:STX)
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Below are key drivers of Seagates's value that present opportunities for upside or downside to the current Trefis price estimate for Seagate:
- Laptop HDD and SSD Units Sold: The mobile storage business has been growing at an average annual growth rate of nearly 22 percent since 2007. It has grown from 25 million units sold in 2007 to 55 million units in 2011. We estimate that the mobile HDD business of Seagate, driven by a robust growth in the mobile computing industry will become the most valuable division by the end of our forecast period. Currently the mobile HDD division sells nearly 55 million units per year and we estimate that it will will grow to 160 million units by the end of our forecast period. The price per unit sold is estimated to fall from its current level of about $60 per unit sold to about $42 per unit sold as cost per GB falls. We can expect a potential upside of about 15% to the current price estimate, if the number of units sold increases at a faster rate to reach around 230 million units by the end of the forecast period. On the other hand, if the price per unit sold decreases at a much faster rate, to reach around $30 per unit sold, by the end of our forecast period, we can expect a downside of upto 15%.
- Consumer Electronics Units Sold:
We estimate that the consumer electronics business will grow from its current level of about 35 million units a year to 90 million units by the end of our forecast period. We also expect the prices to rise from its current level of about $60 per unit to about $78 per unit by the end of our forecast period. We can expect a potential upside of 15% to the current price estimate, if the number of units sold increases at a faster rate and reaches 150 million units by the end of our forecast period. If this growth slows, due to increasing commoditization of the external storage drives and growth is restricted to 60 million units by the end of our forecast period, we can expect a downside of nearly 10% to the current price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for Seagate at the top of the page.
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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. 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 cameras, digital video recorders, gaming consoles, personal data backup systems, portable external storage systems 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 2012, 2011 and 2010, Dell Inc. accounted for approximately 15%, 13% and 11% of consolidated revenue, respectively, while Hewlett-Packard Company accounted for approximately 14%, 15% and 16% of consolidated revenue, respectively.
It also provides data storage services for SME's which include online backup, data protection and recovery solutions.
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Mobile Computing Drives Mobile HDD Sales
We estimate that the mobile HDD business of Seagate, driven by a robust growth in the mobile computing industry due to the penetration of notebooks and netbooks will become the most valuable division by the end of our forecast period. Currently the mobile HDD division sells nearly 55 million units per year and we estimate that till will grow to 160 million units by the end of our forecast period.
Consumer Electronics HDD Business Helps Margins
The personal external storage HDD market is fairly commoditized and users are price sensitive, which leads to lower prices and margins. Seagate has launched a line of differentiated products in the client non-compute segement, such as the GoFlex TV HD Media Player, Home Network Storage System, Net Media Sharing Device and similar devices which takes personal data backup to the next level. These products are a step ahead of personal external storage hard disks which are relatively low margin products and command higher prices and margins. We estimate that the consumer electronics business will grow from its current level of about 35 million units a year to 90 million units by the end of our forecast period. We also expect the prices to rise from its current level of about $60 per unit to about $78 per unit by the end of our forecast period.
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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.
Pricing Trends
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. The industry has recovered since the flooding and we believe that the prices will stabilize and then begin to fall as operations ramp up again.
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. These drives are unlikely to find extensive use in desktops in the near future.
Rise Of The Tablet Computer
All tablet computers use solid state memory chips as their primary storage memory and we estimate that tablet sales will outstrip notebook and netbook sales by the end of our forecast period. HDD memory is relatively unresponsive, slow and bulky and will not find application in tablet computers. The increasing popularity of tablet computers is the primary reason for growth in the SSD space.
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.
Industry Consolidation
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. 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.
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.
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