A Look At Our $56 Price Estimate For Seagate Technology

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Seagate Technology’s (NASDAQ: STX) stock price has seen over 20% gains year-to-date. This can be attributed to an expected improvement in earnings, after a sharp decline in the recent quarters, partly led by slower demand for the enterprise and cloud business. However, the stock price seems to have some room for further growth. This note details Trefis’ forecasts for Seagate for the fiscal 2019. You can view our interactive dashboard analysis on ~ What Is The Share Price Estimate For Seagate Based On Expected Fiscal 2019 Earnings? ~ for more details on the expected performance of the company. In addition, you can see more of our data for information technology companies here.

What Are The Key Sources of Seagate’s Revenue, And How Have They Trended In Recent Quarters?

  • Seagate generates its revenues primarily from sales of various storage products, clubbed under three key segments ~ Enterprise & Cloud Storage, Edge Compute, and Edge Non-Compute.
  • Seagate’s enterprise storage caters to businesses and institutional clients (primarily data centers). It accounted for 42% of the company’s total revenues in fiscal 2018.
  • Edge Compute includes storage products for computing devices (PCs and notebooks). The segment contributed 23% to the company’s total sales in last fiscal.
  • Edge Non-Compute refers to storage solutions for consumer electronics, including gaming consoles, along with external storage solutions. It accounted for 35% of the company’s total revenues in fiscal 2018.
  • Total Revenues for Seagate have trended lower over recent quarters, declining from $2.8 billion in Q3 FY 2018 to $2.3 billion in Q3 FY 2019.

How Does The Revenue Growth of Seagate Compare To Its Peers?

  • Seagate’s revenue decline in the recent past has been lower than Western Digital but higher than NetApp.
  • Western Digital’s revenue declined at an average of 7.2% over the last four quarters.
  • NetApp’s revenues have grown at an average rate of 0.2% over the last four quarters.
  • This compares with an average 4.3% decline in Seagate’s revenue over the same period.
  • The decline in Western Digital has been higher given its exposure to flash-based products, which has seen massive price declines over the past few quarters, while NetApp has benefited from the transition to flash-based storage.

How Much Can Seagate’s Top Line Decline In 2019?

  • Seagate’s top line will likely decline 8% to $10.4 billion in fiscal 2019.
  • Enterprise And Cloud Storage revenue grew 14% to $4.65 billion in 2018, but they will likely decline 11% in fiscal 2019.  This can be attributed to lower enterprise storage products sales, given softer enterprise demand. The global server market grew 5% in 2018, and it could see a slowdown in 2019, given the expected launch of new processors in the near term. The company’s management in its recent earnings conference call stated that the trends in demand for its Nearline products can partly be  attributed to cloud customers anticipating the transition to high capacity drives. The company started shipping its 16 terabytes drives toward the end of calendar Q1 this year, and it should aid the sales growth in the coming quarters.
  • Edge Compute sales are trending lower amid lower PC sales, given the shortage of Intel chips.  The segment revenues declined 4% in fiscal 2018, while they are expected to decline 19% to $2.1 billion in fiscal 2019.  Intel saw strong data center demand over the last year or so, which led to production issues for its 14nm chips. This trend is expected to continue in the near term, and could impact Seagate’s sales as well.
  • Edge Non-Compute sales are also declining due to pricing headwinds for flash-based products, given a global decline in NAND prices. The segment revenues declined 2% in the last fiscal, while they are expected to grow 3% to $4.2 billion in the current fiscal. NAND prices saw a 20% dip in Q1 2019, and they are expected to see another 15% decline sequentially in Q2 2019.

How Much Can Seagate’s Earnings Decline Based On The Expected Revenue Trends Above?

  • Seagate’s full fiscal 2019 earnings will likely be $4.94 per share, reflecting a 11% decline over the prior fiscal.
  • Earnings decline can primarily be attributed to lower revenues.
  • Trade tensions with China are further adding to the demand woes, and the company recently decided to shut down its plant in China.

What Is Seagate’s Share Price Estimate Based On the Above?

  • Our price estimate of $56 for Seagate is based on a 11x price to earnings multiple, and earnings of $4.94 per share in fiscal 2019.
  • The multiple for Seagate valuation is in line with the consensus for the overall sector.

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