Will Seagate Stock Go Up?

Shares of Seagate Technology plc (NASDAQ:STX) went up by more than 25% over the past six months as investor optimism soared about the prospects for increased data storage demand from AI applications.

While the stock delivered market-beating returns over the past year, it fell by nearly 8% over the past month so now what does the future hold?

Seagate Goes Direct To Buyer

Increasingly it’s becoming obvious that the compute power needed to service AI applications will demand high amounts of storage space and electricity. Seagate, which offers technology and services related to data storage, stands to benefit from the growing demand.

Somewhat surprisingly, it launched an e-commerce platform in the United States to allow buyers to get the newest storage products directly from www.seagate.com, thereby cutting out margin creep paid to third parties.

Shopping experiences are tailored to each customer, resulting in customized deals, and dedicated support, key features that are helping to strengthen brand loyalty.

On the product side, Seagate has created the Mozaic 3+™ hard drive platform that mixes in HAMR technology and leads the market with areal densities of over 3TB per platter. Forecasts for future generations are for 4TB+ and even as high as 5TB+. In the field of Hard Drive technology, these advancements cement Seagate’s position as an industry leader. 

The platform’s inclusion in the Exos® product line, which has storage abilities exceeding 30TB, further exemplifies Seagate’s ability to meet rising demand from hyper-scale cloud customers.

Do Dividends Promise Steady Income?

Although Seagate pays $2.80 annually, representing a 3.29% yield, sustainability remains a looming red flag because Seagate suffers from weak profit margins and a negative payout ratio.

This negative figure means the company does not make enough money to cover its dividend payments. Seagate pays out dividends at a rate that is substantially higher than what it earns in profits.

As a result, Seagate is likely too reliant on borrowings or other financial wizardry to keep up with its dividend payments, creating sustainability risks.

At the very least, investors should be wary of potential financial difficulties looming up ahead because dividends are being preferred over R&D or lowering the debt burden.

Do Seagate’s Financials Look Good?

In the last six months, Seagate’s figures show concerning patterns such as a revenue decline to $1.56 billion in the second quarter of fiscal year 2024, translating to a 7.6% fall compared to the same period in the previous year.

The decline also appeared in the non-GAAP gross profit, which is down by 8.9% compared to last year, reaching $367 million. Furthermore, net income and the earnings per share on a non-GAAP basis saw reductions of 26.5% and 25% to reach $25 million and $0.12 each.

During FY 2024 Q1 that ended on September 29, 2023, management reported diminishing performance with the top line falling by 28.5% compared with last year to $1.45 billion, while non-GAAP gross profit dropped to $288 million, a decline of 42.2%.

Furthermore, the firm recorded a non-GAAP net loss of $46 million and a non-GAAP per share loss of about $0.22, which highlights how tough things have been for the company.

What’s Ahead for Seagate?

Seagate is expected to generate $1.66 billion in revenue for the fiscal third quarter of 2024, which ended in March. It suggests a decrease of close to 10.8% compared to the top line figure from the same period last year. Earnings per share is expected to stand at $0.26.

Next quarter, analysts anticipate a revenue slide of 12.1% on a year-over-year basis. They forecast revenue will reach $6.49 billion, and earnings per share might be closer to $0.71.

In three of the last four quarters, Seagate did not reach the revenue numbers that had been forecast, so there is a very real concern that another miss may be on the horizon.

Are Executive Sales a Concern?

Investors should make a note of share sales by Gianluca Romano, EVP & CFO at Seagate. On February 22, 2024, he sold 5,611 shares, and then on March 3, 2024, again sold another batch of 485

It’s not a reason to sell alone when the top brass decides to offload shares. Oftentimes these are part of scheduled sales in fact, but it’s a breadcrumb that forms an overall analysis and when insiders sell en masse, especially in clusters, it often is a prelude to more pronounced market correction.

Will Seagate Stock Go Up?

Analysts are not forecasting Seagate will go up materially in the near future. For the most part, they suggest a “wait and see” approach, with 13 of the 24 covering the stock recommending it as a Hold. 

Seagate is trading at a high multiple versus sector counterparts. The forward non-GAAP earnings multiple of Seagate is 118.17x, which is more than 4x the sector median. The semiconductor firm’s forward price-to-cash flow ratio stands at 33.37x, which is nearly 46% above the sector average.

Looking back over the past 5 years, it becomes even more apparent that Seagate’s valuation is lofty. The price-to-earnings and price-to-cash flow premiums relative to long-term averages are 127% and 165% respectively.

Although recent product releases suggest Seagate is poised to grow, its lofty valuation doesn’t support an especially enthusiastic purchase schedule at this time. The bottom line is that the future is likely to hold better entry points that skew the reward to risk ratio of purchasing more in favor of buyers.

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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.