Technology stock

Is Seagate Technology stock a buy it now?

Share price Seagate Technology Holdings (NASDAQ: STX) fell 8% on July 22 after the hard drive maker released its fourth quarter results. Its revenue fell 13% year-over-year to $2.63 billion, significantly missing analysts’ estimates of $160 million. Its adjusted net income fell 24% to $355 million, or $1.59 per share, which also missed Wall Street expectations of $0.30.

In the first quarter, Seagate expects revenue to decline 15% to 25% year over year, and adjusted EPS to fall 32% to 49%. Analysts had only expected its revenue and profit to decline by 4% and 6%, respectively. Those numbers were dire, but could Seagate become a value play after losing nearly a third of its market value this year?

Image source: Getty Images.

Understanding Seagate’s Business

Seagate is the world’s largest manufacturer of traditional platter hard drives (HDDs). It controlled 44% of the hard drive market in the first quarter of calendar year 2022, according to Coughlin Associates, while its closest competitor, western digital (NASDAQ: WDC)held a 37% share.

In recent years, hard drives have been disrupted by flash-based solid-state drives, which are smaller, faster, more energy efficient, and less prone to damage than platter drives. However, SSDs are still more expensive than HDDs of the same capacity.

Seagate and Western Digital have handled this market shift in different ways. Seagate continued to focus on developing larger capacity hard drives for enterprise and data center customers, moved away from lower capacity consumer hard drives, and sold fewer SSDs. Seagate did not produce its own memory chips for these SSDs; he instead bought them from Kioxia, formerly known as Toshiba Memory.

Meanwhile, Western Digital aggressively expanded into the SSD market by acquiring SanDisk and other flash chip makers. Today, WD generates more than half of its revenue from flash memory chips and SSDs.

Seagate’s relatively conservative approach has insulated it from cyclical headwinds in the memory market and allowed it to generate plenty of cash for buybacks and dividends. Over the past 10 years, it has reduced its number of shares by almost 50%. The stock currently pays a forward dividend yield of 3.4%.

Seagate slowdown tracking

Seagate’s revenue rose just 1% to $10.5 billion in fiscal 2020, which ended in calendar year July, as its adjusted EPS fell 4 %.

But in fiscal 2021, its revenue rose 2% to $10.6 billion, as its adjusted EPS rose 14%. This acceleration seems minor, but it indicates that Seagate’s simple focus on producing cheaper, high-capacity drives for cost-conscious customers is still generating slow, sustainable growth.

Seagate’s revenue grew 9% to $11.7 billion in fiscal 2022 as more data center and cloud customers increased storage capacity. Its gross and operating margins increased and its adjusted EPS jumped 45%. But if we break down Seagate’s quarterly growth rates, the cracks start to show:

Period

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

Year-over-year revenue growth (decline)

15%

35%

19%

3%

(13%)

Gross margin

29.6%

31%

30.7%

29.2%

29.3%

Operating margin

18.1%

20.1%

19.9%

16.8%

16.1%

Data source: Seagate. YOY = year after year.

Seagate’s year-over-year revenue growth has actually slowed in recent quarters — and finally turned negative in the fourth quarter — as its gross and operating margins fell sequentially. Its outlook for the first quarter indicates that the slowdown will intensify through fiscal 2023.

Intensification of headwinds and very few tailwinds

Seagate attributed the slowdown primarily to weak demand for consumer PCs and external drives, as well as COVID-19-related disruptions in Asia, non-HDD component shortages indirectly limiting its sales in some markets, and the intensification of inflationary headwinds.

During the conference call, CEO Dave Mosley said that in response to these macroeconomic challenges, Seagate would reduce manufacturing and cut costs to maintain a “favorable pricing environment.”

This slowdown is likely to continue as macro headwinds intensify and PC and cloud markets experience tough downturns after the peak of the pandemic. Both of these markets have benefited from tailwinds throughout the pandemic as more people work remotely and access more cloud-based services.

Analysts expected Seagate’s revenue and adjusted EPS to decline 6% and 15%, respectively, in fiscal 2023. However, these estimates may be too optimistic based on Seagate’s latest warning. .

There are better dividend stocks to buy

Seagate shares trade at only 12 times forward earnings, but they are getting cheaper as they face a tough cyclical downturn. Its yield seems attractive, especially since Western Digital no longer pays a dividend. But many other blue-chip tech stocks are paying comparable dividends while facing softer macro headwinds. Consequently, Seagate had a great run last year, but it will likely remain out of favor this year.

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Leo Sun has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.