Is Seagate Stock a Buy?

Seagate (STX) is one of the world’s largest hard disk drive (HDD) manufacturers but it’s typically considered a slow growing stock.

Hard drive demand isn’t what it used to be, and these are slowly being replaced by SSDs, or solid-state drives, which:

• Have flash memory
• Are smaller and faster
• Use power more efficiently
• Aren’t as prone to damage

 

Seagate’s nearest competitor, Western Digital (WDC), expanded its SSD products when it bought out chipmaker, SanDisk, in 2016.

Conversely, Seagate continues generating the bulk of its revenue from HDDs. Critics of this decision say this is exactly why Seagate is weaker as an investment than Western Digital.

In spite of the skepticism around its strategy, Seagate has skyrocketed almost 550% in the last 10 years compared to Western Digital’s 120%. Just this year alone, Seagate has risen almost 60% while WD only gained around 35%.

So, why then is STX seeing such impressive gains when it’s often criticized for dying on the hill of increasingly obsolete technology?

Are Analysts Missing Something?

Critics of Seagate’s undying devotion to HDDs consider it a weakness. SSDs are smaller, can process faster using less power, and aren’t prone to data loss. And consumers flocked to the devices using this technology when it was first released – until they realized, “Wait a minute – it can do all that, but it can’t hold the same amount of information as a hard drive for the same money?”

One of the reasons why Seagate is smart to hold onto what others see as dinosaur technology is the fact there will always be a need for hard drives, especially for datacenters.

Plus, SSDs are priced well above HDDs, even when the gigabyte storage is the same – or less. Ask anyone who’s bought a small laptop with an SSD rather than an HDD – it’s basically a glorified cellphone.

And that’s perfect for the consumer who stores all their documents, photos, and music in the cloud. But what about those old-school consumers who’d rather keep their data private on their own device instead of using the cloud, which is necessary depending on the amount of information you typically store?

Seagate Built a Moat

While SSDs have replaced hard drives in many consumer-facing devices, such as tablets and laptops, solid-state drives aren’t seeing as much action on the enterprise, cloud, or datacenter fronts because these industries prize higher storage and lower prices versus faster speeds.

Because of this shift, Seagate saw an opportunity and seized it, pivoting away from low-capacity consumer products and developing high-capacity hard drives instead.

This decision didn’t require as much capital as Western Digital expended developing its flash memory and solid-state drives – plus, it placed a moat around Seagate. Not having to deal with chip and semiconductor shortages and volatile prices has allowed Seagate to sustain its stability and predictability over the last five years – which Western Digital can’t say.

Share Buybacks and Dividends Win Over Investors

STX also used much of its FCF on buying back shares and paying out dividends rather than investing more into the SSD market. It’s this conservation that let Seagate reduce outstanding shares by over 45% in the past 10 years. On the contrary, Western Digital issued 30% more shares to cover the SanDisk acquisition.

Another highlight of Seagate that kept investors happy was continued dividend payments even while the world was in the throws of a pandemic – Western Digital suspended its dividends in April 2020.

Seagate’s forward dividend yields are 2.7%, costing the company only 63% of total FCF in the last year. The company also raised dividend payouts in 2019 – the first time the company had done so in more than four years. In October 2020, Seagate boosted dividend payouts once again.

Increasing Growth and a Bargain Price? Yes, Please!

FY2020 saw Seagate’s revenue rise to $10.5 billion – but the costs associated with labor and material shortages over the past year squeezed the company’s gross margins and operating allowances. Its adjusted EPS fell 4% as a result.

It has since stabilized and begun its rebound. In fact, Seagate expects gross margins of 30-33% by end of FY2022, thanks to additional revenue from the company’s high-margin, high-capacity hard drives.

Additionally, more sales should come from the company’s “priced just right” drives with 2 TB of storage – today, these drives don’t even count for one-fifth of the company’s revenue.

The first nine months of FY2021 saw revenue drop 4% YOY to $7.7 billion. Much of the loss occurred during the first six months of the year, and revenue began climbing once again in Q3. Analysts expect a 1% revenue increase for FY2021 by end of year, and growth of 8% for FY2022.

Adjusted EPS dropped 2% YOY for the first three quarters of 2021, but growth of 9% by year’s end is anticipated. For FY2022, earnings are expected to jump over 30% as the company is able to buyback more shares and gross and operating margins finally get some breathing room.

Is Seagate Stock A Buy?

That’s some pretty healthy growth rates – especially for a stock currently trading at 18 times its next-year earnings. This company’s lower valuation, sustainable yield (still soaring above the 1.5% Treasury yield!), and market cap makes it quite the attractive investment, especially as the market appears to be pivoting more from growth stocks to value stocks.

If you want in on the Seagate train, it’s not too late. Its core market is still viable. It isn’t dying, dead, or a dinosaur – it’s just evolving. As the company continues generously rewarding its most patient shareholders, the time could well be now for Seagate stock as it has sold off in recent months.

Is Seagate stock a buy? It would appear so for patient investors who like a company with a moat. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.