Seagate Technology Holdings plc STX stock has slipped 9.9% in the past month compared with the industry and S&P 500 Composite’s decline of 4.2% and 2.7%, respectively.
Price Performance
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The stock fell 1% in the last trading session and closed at $88.69, trading near its 52-week low of $81.88. The factors that could have put downward pressure on the stock include concerns surrounding delays in the qualifications of its HAMR (Heat-Assisted Magnetic Recording) technology, economic headwinds in China affecting its VIA segment, and shrinking revenue from legacy products. High debt and a historically cyclical HDD industry remain other concerns.
However, this recent pullback could be a strategic entry point for investors seeking value. STX is currently trading at a forward 12-month price-to-earnings ratio of 9.03, a discount compared with the industry’s 19.38. The stock’s current Value Score of B also validates its appeal.
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That said, let us analyze why Seagate is a compelling investment opportunity by examining the company’s inherent strengths.
Mass Capacity Demand Driving Revenues
Seagate’s increasing mass capacity revenues continue to propel its growth trajectory amid stiff competition from prominent players in the storage space like NetApp NTAP, Pure Storage PSTG and Western Digital Corporation WDC.
Stronger nearline cloud demand and increasing nearline enterprise sales remain tailwinds. Nearline cloud demand is being driven by cloud service providers (“CSPs”) across the United States. On the last earnings call, Seagate added that it has been witnessing positive demand trends globally. In the last reported quarter, mass capacity revenues surged 70% year over year and 21% sequentially. Its mass capacity exabyte shipments now represent more than 93% of HDD exabyte shipments.
Also, Seagate’s build-to-order strategy bodes well. This strategy has streamlined its operations, ensuring better alignment between production and customer demand.
The strong performance of mass-capacity products is also driving margin performance. In the last reported quarter, non-GAAP gross margin increased to 33.3% from 19.8% in the prior-year quarter. This expansion was driven by price adjustment and cost discipline in addition to favorable product mix shift to mass-capacity products.
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HAMR: A Game Changer for STX?
Seagate expects HAMR (heat-assisted magnetic recording) to help exploit megatrends like AI and machine learning, which will likely drive long-term demand for cost-effective mass-capacity storage solutions. The company has been ramping up its 24TB CMR / 28TB SMR drives, and these now represent the second-highest revenue product, contributing more than 20% of total nearline revenues.
Seagate added that the adoption of Mozaic 3+ was gaining steam. The qualification with the lead CSP customer is progressing well, and it has expanded qualifications with several other cloud and enterprise customers in the current quarter. STX expects shipment and revenue ramp timing across the wider client base from mid-2025.
The company anticipates delivering capacity increases through further aerial density gains for its Mozaic 4+ platform. This will lead to lower savings for its customers.
Seagate’s Robust Outlook
Management anticipates continued improvement in the fiscal second quarter, owing to shipments for the latest high-capacity products expanded across global CSPs and enterprise customers. Also, cloud service providers are focusing more on the development and deployment of AI applications while building cloud infrastructure. Seagate believes HDDs will play a key role in enabling these stages of the AI adoption curve and expects HDD demand to pick up pace going ahead.
Management anticipates second-quarter fiscal 2025 revenues to be $2.3 billion (+/- $150 million). STX expects continued momentum in mass capacity demand, caused by strengthening nearline demand from global cloud customers and improvement in the enterprise & OEM markets. This increase in mass capacity revenues is likely to offset lower revenues from legacy and other markets.
Going ahead, STX expects gross margin is expected to benefit from a higher mix of mass capacity revenues and ongoing pricing actions. At the midpoint of the revenue guidance, management expects the non-GAAP operating margin to grow in the low-20s percentage range of revenues in the current quarter.
STX’s Estimate Activity Northbound
Analysts appear to be bullish for Seagate, as implied by the upward estimate revision activity.
In the past 60 days, the earnings estimates for the current quarter and next quarter have been revised upward by 5.6% and 2.5%. The same for the current year has increased 2.9% in the same period.
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How to Strategize Investment in STX Stock?
While challenges persist, Seagate's robust performance, accelerating demand for mass storage, particularly from cloud providers and enterprises, advancements in HAMR technology and efficient build-to-order strategy position it as an attractive investment opportunity.
With the stock currently trading at a discounted price, both new and existing investors may find it an opportune time to buy. The pullback from its 52-week high presents a potential entry point for investors, especially with Seagate holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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