Seagate Technology PLC (STX): Hard Drives Are a Hard Sell

Going into earnings season, investors are worrying about traditional tech hardware operators. The global slowdown could, after all, impact the market. Well, if Seagate Technology PLC (STX) is any indication, it looks like those concerns are real.

Seagate Stock: Hard Drives Are a Hard Sell

Seagate, a top provider of hard disk drives and other storage systems, released preliminary results for the fiscal third quarter, and things are not pretty. You see, STX expects revenues to come in at $2.6 billion and adjusted margins to be about 23%, down from the prior guidance of $2.7 billion in revenues and adjusted margins of 25.6%.

The reaction from Wall Street has certainly been harsh. In early trading, STX stock is off 18%. The loss for the past 12 months? A grueling 50%.

And yes, other hardware operators are feeling the pain as well. Consider that Western Digital Corp (WDC) is down 8%, Micron Technology, Inc. (MU) is off 3.5% and NetApp Inc. (NTAP) has shed about 4% in today’s session so far.

As for Seagate’s steep decline, it shouldn’t be too surprising. With general economic weakness around the world, a company like STX is highly susceptible to customer trepidation. The result is that inventory has piled up.

The Source of Seagate’s Misery

Interestingly enough, a big part of the sluggishness is from China. Demand has dwindled across the board, from pricier enterprise offerings to desktop products. It also looks like the decision by Seagate to avoid the low-capacity notebook market has resulted in a loss of momentum. And the market in China isn’t showing signs of a comeback anytime soon, either.

The comment from Seagate CEO Steve Luczo is also a bit fuzzy:

“We are disappointed that we did not anticipate the weaker demand in the March quarter. There are many complex issues impacting the traditional go to market channels in our market, which are reducing our forecast visibility. Despite the disruption of the shifts in our traditional mission critical HDD business in the near term, we believe the long term benefit of cloud architectures for end users, and the related need for very high capacity drives, is a net positive for Seagate and the HDD industry.”

But for investors in Seagate, the word “disruption” should be worrisome and may not necessarily be a “near-term” problem. Let’s face it, PC sales have been in a major slump as demand flows to tablets and smartphones. Based on research from Gartner, PC shipments in Q1 plunged by 9.6%, with the overall volumes at levels not seen since 2007.

Regarding Seagate, the company expects to ship 39 million HDD units in the quarter, just under the Street’s consensus for 40 million.

At the same time, the company may be feeling the pressures from new technologies, such as all-flash systems. Upstart companies like Nimble Storage Inc (NMBL) and Pure Storage Inc (PSTG) have been pushing these types of offerings, which have led to rapid growth on the top line.

Bottom Line on STX Stock

There are certainly plusses to Seagate. For example, the cloud storage systems and silicon-based businesses have showed lots of traction, with revenues expected to surpass $1 billion in fiscal 2016.

Seagate also has continued to generate strong cash flows, raking in $1.2 billion in operating cash across its past two quarters. This has allowed for management to repurchase shares of STX stock as well as feed the income investors with whopping 9.1% dividend yield.

No doubt, the valuation is definitely much more attractive as well, with the forward price-to-earnings multiple at a mere 7.5 times.

Despite all this, investors should still tiptoe cautiously around Seagate stock.

Remember, the company provided a vague explanation for its travails, and we won’t know much more until the full earnings report comes out April 29. In other words, it’s probably best to wait until then before pulling the trigger.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll 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.

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