What’s The Downside On Seagate’s Stock?

Seagate (NASDAQ: STX) is a leading provider of electronic data storage products such as hard disk drives (HDDs), addressing a broad spectrum of clients across multiple segments such as enterprise applications, client compute applications, and client non-compute applications.

Trefis has a price estimate of $44.74 per share for Seagate’s stock, a 16% downside from its current price of around $54 per share.

You can view our interactive dashboard analysis – Seagate Valuation: Expensive or Cheap?

We can break down the stock price estimate into 4 factors: Stock Price = (Total revenue x Net income margin / No. of shares outstanding) x P/E Ratio

A] Estimating Total Revenue

• A drop in revenue of about $400 million from 2017-2019, has largely been due to a drop in demand driven by a lot of factors.
• There has been exponential growth in the use of cloud storage, which has emerged as a preference over local storage devices, due to its high reliability and significantly lower costs.
• There has also been a decrease in PC and laptop sales, which has affected Seagate’s Client Compute revenue, but we expect this to pick up by 2021.
• Enterprise HDD demand is expected to grow steadily, but this could be hampered in the near-term by dropping NAND prices encouraging the switch to flash storage.
• Overall, we expect Revenue to largely remain flat between 2019 and 2021 ($10.39 billion in 2019 to $10.44 billion in 2021).

B] Estimating Net Income using Net Margins

• Even though revenue in 2019 dropped below 2017 levels, net margin has in fact grown from 11.4% to 13.2%.
• This has been due to a drop in product development costs and marketing expenses.
• We expect margins to be around 12.2% in 2021, as R&D costs are expected to rise as Seagate looks to improve its technology to stay relevant amid falling NAND and SSD prices.

C] Estimating EPS using shares outstanding

• We expect EPS to rise to $5.18 per share by 2020 and subsequently drop to $4.66 by 2021, on the back of rising costs.
• However, share repurchases could help somewhat support EPS over the next few years.

D] Estimating share price using P/E multiple

• Seagate’s current PE multiple is around 11.5x.
• However, we expect the PE multiple to be around 9.6x, amidst slowing demand due to streaming and cloud services, which could hamper retail HDD sales going forward.
• This puts our stock price estimate at about $44.74 per share.

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