Seagate Stock: A Smart Bet?

Despite more than a 25% rise since the March lows of this year, at the current price of around $52 per share, we believe Seagate Technology stock (NASDAQ: STX) is still a good opportunity for investors. Seagate stock has increased from $41 to $52 off the recent bottom, less than the S&P which increased by 53% from its lows. Further, the stock is down around 13% from the level it was at the start of the year, and is still far from its 2020 pre-Covid high of $63. We believe that Seagate’s stock could set fresh highs, rising around 20% from its current level, driven by expectations of rising demand and decent Q4 2020 results despite the pandemic. Our dashboard What Factors Drove -8% Change In Seagate Technology Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price drop since mid-2018 came due to a drop in revenue from $11.2 billion in 2018 to $10.5 billion in 2020 (Seagate’s fiscal year ends in June). This translated into a 15.1% drop in net income, but a 9% drop in the outstanding share count, meant that EPS dropped only 6.6% in comparison, from $4.10 in 2018 to $3.83 in 2020.

Seagate’s P/E multiple dropped from 14x in mid-2018 to 12.6x by mid-2020, but has since risen to 13.5x. We believe that the company’s P/E ratio has the potential to see a further increase in the near term on expectations of continuing demand growth and favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns in early 2020 affected Seagate’s manufacturing activity, but the company made a strong comeback to post full-year 2020 revenue of $10.51 billion, up from $10.39 billion in 2019. EPS came in at $3.83 in 2020 vs $7.13 in 2019, down 46%, but a closer look reveals that operating margins in fact dropped from 14.3% in 2019 to 12.4% in 2020, a decrease of 13%, less than a third of the drop in EPS. EPS dropped primarily due to a tax expense of $28 million in 2020, compared to a tax benefit of $640 million in 2019.

With demand for storage devices expected to stay strong, we believe Seagate will see further revenue growth in the near to medium term, translating into a rise in net income.

We expect this to drive up the company’s P/E multiple, and believe that Seagate’s stock can rise around 20% from current levels, to regain its 2020 high of $63.

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