As we start the new year, shareholders of Seagate Technology (STX) have much to cheer about. STX investors pocketed a nice gain of 87% in 2013. In fact, STX stock actually seems more like a hot startup than an old line storage operator.
But for 2013, being “old” was OK. Just look at Western Digital (WDC), which nearly doubled while some hot startups like Fusion-io (FIO) and Violin (VMEM) posted disastrous returns.
So why the enthusiasm for STX? And can the winning ways continue for the New Year? Let’s take a look at the pros and cons:
STX Pros
Global Scale: This is critically important in the storage business. By being a huge player, STX can offer competitive prices. But it also helps that the industry has undergone lots of M&A over the years. The result is that pricing isn’t so cutthroat anymore, which has boosted margins. STX also has the benefit of an extensive product line, which include hard drives, as well as solid-state hybrid and solid-state drives. The company even gets a nice stream of revenues from service offerings like cloud-based backups and data protection.
Innovation: STX hasn’t scrimped on R&D. The company spends more than $1 billion each year on this line item, helping STX to maintain its competitive edge and impressive patent portfolio. There are more than 5,500 patents issued in the U.S. alone. But with STX’s resources, the company has been smart with its M&A strategy. A recent example was a $374 million deal for Xyratex (XRTX), which develops equipment for storage testing. Keep in mind that the technology has proven effective for cloud systems.
Megatrends: Storage looks poised for a long-term growth. A variety of factors are fueling that growth, including the emergence of Big Data, the proliferation of smartphones across the world and the rise of cloud computing. All these require highly-scalable technologies that STX provides. But in the near-term, the company may also get a boost from the resurgence in the U.S. economy, which should also help spur more demand for storage solutions.
STX Cons
Recent Performance: Seagate’s recent performance has been a bit concerning, as seen with the fiscal first-quarter results. Revenues dropped by 6.5% to $3.49 billion and earnings plunged by 27% to $427 million, or $1.16 per share. The storage business can be volatile — after all, STX relies on purchases from large customers, so any delays can have a significant effect on the bottom line. But it’s still worrisome that the company managed to have a bad quarter when the overall industry is benefiting from positive trends.
Disruptions: STX is in the midst of a major transition. The company is making a big push to be a major player in the cloud business, but has been stuck in catch-up mode. At the same time, the PC business remains in decline, and STX still relies heavily on the PC market. While there are some signs of modest improvement — especially given the rebound in the economy — the segment is likely to see continued erosion.
Stock and Dividend: STX stock is no longer cheap, with a price-to-earnings ratio of 12. Consider that Apple (AAPL) is trading at a multiple of 14 and IBM (IBM) is at 12, but these businesses are more diverse and will probably grow at a faster pace. Besides, STX’s dividend yield is only 3.1 — not exactly shabby, but nothing to brag about.
STX Verdict
STX has made all the right moves. It has focused on investing in R&D and has struck some key acquisitions to capitalize on key trends like mobile and cloud computing, all while holding the line on costs.
Despite all this, the fact remains that STX stock is far from cheap and the dividend is no longer as attractive. And as seen with the latest quarter, the company is still facing headwinds — particularly the decline in the PC market and the competition from upstart operators.
So should you buy STX? No, in light of the factors above, the cons outweigh the pros on the stock for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
