Weakness In PC Market To Continue For Seagate, Stock Worth $45
Seagate Technology (NASDAQ:STX) has had a tough 2015 thus far, with a 12% annual decline in revenues to $9.2 billion for the first three quarters of the year. A similar trend was observed by competing hard drive manufacturer Western Digital (NASDAQ:WDC), with its revenues falling by 11% over the prior year period to $10.1 billion for the nine-month period ended September. The decline was largely driven by sustained weakness in the PC market, which led to low product shipments for both companies. Moreover, the enterprise storage segment also observed low product sales after witnessing solid growth through fiscal 2015. The slowdown in product sales for PC and notebooks is likely to continue through the end of the year. However, this segment is likely to drive growth in the long run for the company.
We have a revised $45 price estimate for Seagate’s stock, which is about 20% higher than the current market price. Seagate’s stock price has fallen by over 45% since the beginning of the year and by about 30% in the last three months.
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See Our Full Analysis For Seagate’s stock
Enterprise Storage Sales To Bounce Back
Seagate’s enterprise storage segment was a fast-growing business, with unit shipments rising by almost 14% y-o-y to 35.2 million units. However, unit shipments fell by over 11% over the prior year period to 7.8 million units sold through fiscal Q1 ended September. Demand for enterprise storage was low through the quarter, owing to a relatively compact and concentrated OEM customer base, leading to higher susceptibility to variable demand. The resulting volatile demand led to lower shipments and higher inventory levels. The company expects the demand for enterprise storage units to remain sluggish through the December quarter, with demand picking from early 2016.
Long-term growth is likely to come from hyperscale deployments for data science applications and machine-to-machine data creation in addition to unstructured data in the form of high-definition video and other content created globally. As a result, the company expects a 35% annual growth in data storage capacity or “exabyte growth” for enterprise storage. According to research firm ReportsnReports, the global enterprise storage market is likely to grow at a CAGR of 15% from 2015 through 2019. [1] Enterprise-grade storage systems and hyperscale deployments include hard disk drives (HDDs) and/or solid state drives (SSDs) used in storage-area network, network attached storage or as direct attached storage configurations. Correspondingly, the growth in the enterprise storage market segment will directly impact hard drive manufacturers. Both Western Digital and Seagate are prominent hard drive manufacturers, with a combined share of over 85% in the hard drive market. We currently forecast Seagate’s enterprise and cloud storage shipments to rise from 34.5 million units in 2015 to over 55 million units by the end of our forecast period.
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PC Business Continues To Dwindle
The PC market has been exceptionally weak in the last few quarters, owing to the anticipated mid-year release of Windows 10. According to IDC, PC shipments fell by almost 12% y-o-y in the second quarter this year, about 1 percentage point lower than previous estimates. [2] This translated to low PC and notebook hard drive sales for hard drive makers in the June quarter. Seagate’s combined PC and notebook HDD shipments fell by 25% on an annual basis to 26.5 million units for the quarter.
However, PC sales failed to pick up in Q3 even after Windows 10 was released. A strong U.S. dollar led to price increases in the PC market, while the option to upgrade to Windows 10 on existing machines further bottled the demand for new computers and laptops. As a result, total PC shipments through Q3 stood at 73.7 million units, which was an 8% annual decline. [3] Correspondingly, Seagate’s PC and notebooks hard drive shipments for the quarter were about 26% lower than the year-ago period at 28.8 million units. Going forward, we forecast Seagate’s PC sales to stagnate to just over 50 million units a year through the end of our forecast period from about 57 million units in 2015. On the other hand, laptop sales could recover slightly over the next couple of years before declining in the long run owing to the continued threat from tablet devices.
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Stock Worth $45
Seagate is poised to capitalize on shifting trends in the storage market with an enhanced focus on fast-moving market segments. The company acquired storage array and storage software provider Dot Hill Systems for $645 million in August this year, and the integration of Dot Hill within Seagate should lead to cost synergies. Additionally, the company is working on developing alternatives to SSDs for the enterprise-storage market with new-gen storage solutions including Helium-filled drives, shingled magnetic recording drives, heat-assisted magnetic recording drives and the Kinetic Open Storage platform. We believe that the solid growth expected in its enterprise storage segment should help Seagate maintain its position as a leading hard drive manufacturer. However, weakness in the PC and notebook market is expected to weigh down earnings in the near term.
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More Trefis Research
- Global Enterprise Storage Market 2015-2019, ReportsnReports, January 2015 [↩]
- PC Market Continues to Decline Ahead of Windows 10 Release, According to IDC, Business Wire, July 2015 [↩]
- PC sales dive 7.7 percent in the third quarter despite Windows 10 release, The Inquirer, October 2015 [↩]