Is Seagate Technology (STX) Stock a Buy on This Dip?

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Seagate Technology PLC (NASDAQ:STX) stock is sinking today after the company reported messy fourth-quarter results. The technology company missed earnings and revenue estimates by a wide mark. Long-time Chief Executive Officer Steve Luczo announced he is transitioning out of the CEO role. Management also announced a restructuring plan wherein Seagate will cut about 600 jobs.

Is Seagate Technology (STX) Stock a Buy on This Dip?

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It was a perfect storm for bears. A big earnings miss, a CEO departure and job cuts are all signals that Seagate is a sinking ship. Investors got spooked, and selling has taken place in droves. As of this writing, STX stock is down about 15% on the day.

But where there’s rubble, there is sometimes value.

That might be the case with Seagate stock. Seagate Technology is a company that is struggling in the near-term, but it has promising long-term growth potential. STX stock, though, is priced for these near-term struggles to continue into the foreseeable future.

I don’t love Seagate stock, but I’m starting to like it. Near-term pain comes with the territory of contrarian investing, but the long-term growth outlook for STX stock is promising.

Let’s take a closer look.

Seagate Should Benefit From Secular Trends

STX management keeps trying to sell investors on the idea that the explosion of data and data storage in today’s increasingly connected world is a long-term tailwind for Seagate Technology’s business.

That’s true. Secular growth narratives like the internet of things, automated driving, and artificial intelligence are creating a proliferation of data like we’ve never seen before. These growth narratives are still in their early innings, and so the data explosion story is just getting started. That should prop up demand for Seagate’s HDD (hard disk drive) products.

But here’s the thing. This proliferation of data across all mediums has been happening for the past several years. Digitalization isn’t that new. The internet of things has been around for a few years. Same with hyperscale data centers that support cloud data migration. Same with big data collection and storage, the huge shift from desktop to mobile, preliminary artificial intelligence, machine learning and virtualization.

None of this stuff is brand new. They are all secular growth narratives, which have been intact for the past few years. But STX has struggled to grow even with these secular trends acting as tailwinds.

And that’s because Seagate Technology is struggling to adjust its business model to fully accommodate these new technology demands. As CEO Luzco said in the Q4 press release: “… near-term dynamics of technology shifts present demand variations for the storage industry from time to time.”

But it really is only a matter of time before STX does adjust to accommodate these new technology demands. Seagate is a long-time leader in its space. The management team has plenty of experience and the balance sheet has plenty of flexibility. In a long-term window, STX will adjust and secular tailwinds in data growth should, at the very least, stabilize operations.

STX Stock Is Really Cheap

Seagate Technology earned $4.12 in earnings-per-share over the last 12 months; STX stock trades around $33.

That means STX stock is trading at just 8-times trailing earnings. That is far too cheap for a company that can very likely grow earnings over the next several years thanks to market tailwinds. Moreover, according to YCharts, this as cheap as STX stock has been since early 2016.

Seagate is also a cash flow machine. The company generated $1.9 billion in operating cash flow in 2017, up 14% year-over-year. That equates to about $6.40 in cash EPS, implying STX stock trades at around 5-times trailing cash earnings.

No matter how you look at it, Seagate stock is just far too cheap for investors to ignore at these levels.

Bottom Line on STX stock

I’m not in love with Seagate stock, but if offers compelling value here if you think the company can stabilize its operations. The bull thesis supporting a stabilization of operations over the next several years is supported by secular growth trends in data creation. Consequently, the risk-reward lies in favor on bulls at these levels.

As of this writing, Luke Lango was long STX.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/seagate-technology-stx-stock-buy-dip/.

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