VALUATION HIGHLIGHTS

1. Enterprise & Cloud Storage constitutes 100% of the Trefis price estimate for Seagate's stock.

WHAT HAS CHANGED?

STX Stock Performance

STX stock has seen extremely strong gains of 40% from levels of $60 in early January 2021 to around $85 now (mid March 2024), vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.

However, the increase in STX stock has been far from consistent. Returns for the stock were 82% in 2021, -53% in 2022, and 62% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that STX underperformed the S&P in 2022.

Q2 '24 Earnings

Seagate reported net sales of $1.56 billion in Q2'24, down 18% from $1.9 billion in Q2'24 due to a continued decline in storage demand. The adjusted operating margin expanded from 5.8% in the prior year quarter to 8.2% in Q2'24. The company's EPS fell to $(0.09) from $0.16 over this period.

Note: Seagate's FY'23 ended on June 30, 2023.

BUSINESS SUMMARY

Seagate is a leading provider of data storage technology and solutions. Their principal products are hard disk drives, commonly referred to as disk drives, hard drives, or HDDs. In addition to HDDs, they produce a broad range of data storage products including solid state drives (“SSDs”), solid state hybrid drives (“SSHDs”), storage subsystems, as well as a scalable edge-to-cloud mass data platform that includes data transfer shuttles and a storage-as-a-service cloud.

HDDs are devices that store digitally encoded data on rapidly rotating disks with magnetic surfaces. HDDs continue to be the primary medium of mass data storage due to their performance attributes, reliability, high capacities, superior quality, and cost effectiveness. Complementing existing storage architectures, SSDs use integrated circuit assemblies as memory to store data, and most SSDs use NAND flash memory. In contrast to HDDs and SSDs, SSHDs combine the features of SSDs and HDDs in the same unit, containing a high-capacity HDD and a smaller SSD acting as a cache to improve performance of frequently accessed data. Seagate's HDD products are designed for mass capacity storage and legacy markets. Mass capacity storage involves well-established use cases—such as hyperscale data centers and public clouds as well as emerging use cases. Legacy markets include markets they continue to service but don't plan to invest in significantly. Seagate's HDD and SSD product portfolio includes Serial Advanced Technology Attachment (“SATA”), Serial Attached SCSI (“SAS”) and Non-Volatile Memory Express (“NVMe”) based designs to support a wide variety of mass capacity and legacy applications. The systems portfolio includes storage subsystems for enterprises, cloud service providers, scale-out storage servers, and original equipment manufacturers (“OEMs”). Engineered for modularity, mobility, capacity, and performance, these solutions include enterprise HDDs and SSDs, enabling customers to integrate powerful, scalable storage within legacy environments or build new ecosystems from the ground up in a secure, cost-effective manner.

Seagate's Lyve portfolio provides a simple, cost-efficient, and secure way to manage massive volumes of data across the distributed enterprise. The Lyve platform includes a shuttle solution that enables enterprises to transfer massive amounts of data from endpoints to the core cloud, a storage-as-a-service cloud that provides frictionless mass capacity storage at the metro edge, a converged object storage solution enabling efficient capture and consolidation of massive data sets, and Cortx, an open-source object storage software optimized for mass capacity and data-intensive workloads.

SOURCES OF VALUE

Enterprise Storage Unit Sales

We estimate that the enterprise and cloud storage business of Seagate, driven by robust growth in the cloud computing industry, will become the most valuable part of their business by the end of our forecast period.

Flash-based Enterprise Storage Helps Margins

Flash-based storage has higher margins than traditional HDDs. Seagate also acquired Avago Technologies-owned LSI's flash business to enhance its flash portfolio. However, NAND pricing has seen significant declines in the recent past, given the transition to 3D NAND, and this has impacted the average selling prices of flash-based products.

KEY TRENDS

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 drive solutions in the end-user market. The need for storing data locally is counteracted by the growing presence of cloud-based storage, which eliminates 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 declining.

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 lead to a drop in SSD prices, we can expect that solid-state drives will become a standard for notebooks and netbooks.

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 stay ahead of changing trends such as the shift to SSD.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Seagate's value that present opportunities for upside or downside to the current Trefis price estimate for Seagate:

• Storage Solutions: The only segment, storage solutions, has struggled in the last few years, with the revenues dropping from $14.35 billion in FY'13 to $7.8 billion in FY'23. We estimate that Seagate's business will rebound over our forecast period, rising to around $11 billion by 2030. If the revenue growth rises to high-single-digit growth through the end of our forecast period, we can expect a potential upside of about 20% to the current price estimate.