Seagate Technology PLC (NASDAQ:STX) is in a rut on the stock market. STX stock imploded in April when the company reported third-quarter results that missed revenue consensus numbers. It also forecast a light fourth quarter.
With the stock down over 20% from yearly highs, Seagate must prove to its investors that business is getting better for hardware storage.
Ahead of last quarter’s earnings report, the market bid the stock to yearly highs, only to show disappointment by selling STX stock. The company earned $1.10 a share (compared to the $1.07 per share consensus), or $0.65 a share GAAP, on revenue of $2.67 billion (up 3.1% year-over-year). Analysts expected a revenue number that was $40 million higher.
Seagate made $426 million in cash flow from operations, by shipping 65.5 exabytes (1.8TB on average, per device). Enterprise accounted for 36% of total revenue, while client-compute was 25% of the total. Client non-compute made the remaining 29% of revenue.
Seagate: Fourth-Quarter Guidance
On Apr. 26, STX forecast 31% gross margin, up from 30.5% in Q3. Although the company experienced stable demand and characterized its operational execution as good, it still issued a conservative outlook. Seagate expects revenue in the range of $2.5 billion to $2.6 billion. Management fretted over seasonal weakness and component shortages in NAND and DRAM.
The worries from management and STX stock investors are realistic: supercomputer maker Super Micro Computer, Inc. (NASDAQ:SMCI) issued a preliminary quarterly forecast that was sharply lower than its previous guidance. SMCI had expected earnings of $0.40 to $0.50 a share in earnings. It now expects profit of $0.35 to $0.37 a share. Seagate cited higher DRAM and SSD (solid-state drives) as reasons for the lower earnings.
Micron Technology, Inc. (NASDAQ:MU) may enjoy the higher DRAM and NAND pricing environment, but STX stock could take another hit if those higher costs hurt earnings. Still, Seagate is optimistic that demand for Exabyte will grow in the double-digit range this year. This will translate to earnings of $4.50 a share for this calendar year.
At a valuation of 8.6 times forward earnings and a price-to-earnings ratio of 16.3 times, Seagate stock will attract value investors. After all, the world still needs data storage. According to IDC, data creation will soar to 163ZB by 2025. Machine learning will need 5.2ZB in data analysis.
Expectations for STX Stock
Chances are good that STX will report flat YOY average exabytes shipped. Capital expenditures and maintenance capitals will stay below 5% of Seagate’s revenue. It will run at full capacity, despite consolidating its manufacturing. For this reason, the company’s profit margin will improve even though demand in the quarter may moderate.
For Q4 and the rest of the year, demand levels should improve. Demand for PCs, notebooks and smartphones drive higher data consumption. In the back-end, servers powering the Cloud will need more storage. Even if there is a blip (down) in demand in Q4, Seagate will still benefit from a rebound in the quarter that follows.
Furthermore, the embedded market will grow at a healthy pace in the quarter. Strong demand in the OEM space will give this segment a lift for STX. OEMs are spending their efforts on R&D activities first. Once they establish the market opportunities, it will realize it needs to integrate Seagate parts in the solution. This includes hard disks (HDs) and SSDs.
Eventually, customers will demand software that has the capability to optimize the solution at the sub-system level. STX could potentially get into providing such solutions. This would raise its profit margin in the long run.
Bottom Line: Seagate might get a boost if it beats its lowered forecast. If it does not, the future is still bright and any drop in STX stock represents a compelling buying opportunity for value investors.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.