What’s Behind 65% Rise In Seagate Stock In A Year?

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STX: Seagate Technology logo
STX
Seagate Technology

The stock price of Seagate (NASDAQ: STX) saw a 6% jump on Wednesday, June 5, after the company’s management stated that it will see better than anticipated margins in Q4 (Seagate’s fiscal ends in June). Seagate’s peer – Western Digital (NASDAQ: WDC) – also saw its stock rise 4%. Seagate expects its gross margin to be between 30% and 33% in Q4, compared to expectations of around 30%. This compares with the 26% gross margin it reported in Q3 and 23% for the nine-months period ending March 2024. Earlier in April this year, the company had guided for sales of $1.85 billion and adjusted EPS of $0.70 in Q4. The revenue is expected to be $1.87 billion and adjusted EPS to be $0.73 per the consensus estimates, but after the company’s management’s optimistic outlook, it looks like Seagate will see a better than anticipated Q4. This has boded well for its stock. In fact, if we look at a slightly longer term, STX stock has seen strong gains of 60% from levels of $60 in early January 2021 to around $95 now, vs. an increase of about 40% for the S&P 500 over this roughly three-year period. The rise in STX stock lately can be attributed to a recovery in demand and the company’s focus on Heat Assisted Magnetic Recording (HAMR) products.

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. In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could STX face a similar situation as it did in 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, STX stock looks fully priced. We estimate Seagate’s Valuation to be $100 per share, close to its current levels of $97. This implies a 3x revenues P/S multiple for Seagate. The company’s P/S ratio has been in a wide range of 0.9x to 3x in the past five years. This can be attributed to a significant 37% fall in sales in fiscal 2023, owing to lower volume and price erosion amid a significant drop in storage demand.

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Seagate’s revenue growth will benefit from a rebound in cloud demand both in the U.S. and China, resulting in higher exabyte growth. The company shipped only 284 exabytes of storage capacity for the nine-month period ending March 2024, compared to 350 exabytes it shipped in the prior-year period. However, for Q3, exabytes shipped grew 4% y-o-y. This trend will likely be visible in the coming quarters, with a broader recovery in storage demand, and the company’s focus on HAMR products. Seagate is shipping hard disks of 30 TB with the new HAMR technology, and they could last for over seven years, higher than the life of conventional disks. [1] With the demand expected to pick up for HAMR disks, Seagate is well-positioned to benefit from the same. The investors have rewarded STX stock lately despite is falling sales and earnings in recent quarters, primarily considering the HAMR potential in the coming years. However, from the stock’s perspective, we think the positives are largely priced in, given the sharp rally in STX stock.

While STX stock appears to be appropriately priced, 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.

Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 STX Return 4% 13% 153%
 S&P 500 Return 1% 12% 138%
 Trefis Reinforced Value Portfolio 1% 5% 648%

[1] Returns as of 6/6/2024
[2] Cumulative total returns since the end of 2016

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Notes:
  1. Seagate claims its flagship hard drives could last more than 7 years — world’s largest HDD vendor transferred a whopping 3.2PB of data by getting a drive head to work continuously over 6000 hours, Wayne Williams, Techradar, April 18, 2024 []