Seagate stock (NASDAQ: STX) currently trades at $64 per share, 18% below the level seen in March 2021, and it appears appropriately priced. STX stock was trading at around $71 in early June 2022, just before the Fed started increasing rates, and is now 10% below that level, compared to 19% gains for the S&P 500 during this period. This underperformance of Seagate stock can be attributed to declining revenues in recent quarters due to weak consumer demand and higher inflation.
Interestingly, STX stock has had a Sharpe Ratio of 0.3 since early 2017, which is lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
Returning to the pre-inflation shock level of over $116 means that STX stock will have to gain more than 80% from here, and we don’t think this will materialize anytime soon. We find STX stock to be fully valued at its current price of $64. We estimate Seagate’s valuation to be around $64 per share, aligning with its current market price. This is because the sales will likely continue to be lower in the near term.
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Our detailed analysis of Seagate’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
- April 2021: Inflation rates cross 4% and increase rapidly.
- Early 2022: Energy and food prices spike due to Russian invasion of Ukraine. Fed begins its rate hike process.
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
- Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.
In contrast, here’s how STX stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
Seagate and S&P 500 Performance During 2007-08 Crisis
STX stock declined from nearly $27 in September 2007 (pre-crisis peak) to $4 in March 2009 (as the markets bottomed out), implying it lost over 80% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $18 in early 2010, rising about 4x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
Seagate’s Fundamentals Over Recent Years
Seagate’s revenue plunged from $10.5 billion in fiscal 2020 (fiscal ends in June) to 7.4 billion in fiscal 2023 due to unfavorable macroeconomic conditions and storage price erosion. The company expects volume to pick up in early 2024 (calendar). Although the company saw its sales decline in recent years, its operating margin expanded from 12.4% in 2020 to 16.9% in 2022 before falling to -2.1% in 2023 due to price erosion and lower production levels. Our Seagate Operating Income Comparison dashboard has more details. Its earnings stood at $(2.56) on a per share and reported basis in 2023, compared to the $3.83 figure in 2020.
Does Seagate Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?
Seagate’s total debt increased from $4.2 billion in 2020 to $5.5 billion in 2023, while its cash decreased from around $1.7 billion to $0.8 billion over the same period. The company also garnered $0.9 billion in cash flows from operations in 2023. Seagate has a good cash cushion and appears to be in a comfortable position to meet its near-term obligations.
With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Seagate stock has the potential for some gains once fears of a potential recession are allayed. That said, unfavorable macroeconomic factors, storage price erosion, and lower demand are potential risk factors for realizing these gains.
While STX stock appears fully valued, it is helpful to see how Seagate’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
|S&P 500 Return||0%||17%||100%|
|Trefis Reinforced Value Portfolio||-2%||29%||563%|
 Month-to-date and year-to-date as of 9/12/2023
 Cumulative total returns since the end of 2016
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