Technology stock

Read This Before Buying Seagate Technology Stock

We think that Edwards Lifesciences (NYSE:EW) is currently a better choice compared to Seagate Technology (NASDAQ: STX). The two companies have similar net earnings of around $1.5 billion, but Seagate’s current P/S multiple is 2x, while EW’s is nearly 15x. Do these valuations make sense? We think so, and we believe that this gap can only widen. While both companies have seen strong increases in revenue since lockdowns began to be lifted, Edwards Lifesciences has seen much more steady and consistent sales growth over the past five years compared to Seagate. EW’s revenue has grown from $3 billion in fiscal year 2016 to over $5 billion on an LTM basis. By comparison, Seagate’s sales have consistently hovered just below the $11 billion mark since fiscal 2017, and are currently just over $11.5 billion on an LTM basis (Seagate’s fiscal year ends in June).

That said, we dig deeper into the comparison, which makes Edwards Lifesciences a better bet than Seagate, even at these valuations. Let’s step back to examine the fuller picture of the relative valuation of the two companies by looking at detailed historical revenue growth as well as operating profit and operating margin growth, as well as financial condition. Our Dashboard Seagate Technology vs. Edwards Lifesciences: Similar earnings, but Edwards Lifesciences is a better bet has more details on this. Parts of the analysis are summarized below.

1. Edwards Lifesciences leads in revenue growth

Both companies managed to see strong sales growth post-pandemic, but Edwards Lifesciences has seen steadier and more consistent revenue growth over the years. EW’s sales have grown from $3 billion in fiscal 2016 to just over $5 billion on an LTM basis, while Seagate’s revenue just passed $11 billion in an LTM base, after hovering just below $11 billion since FY2017.

Additionally, EW’s pre-Covid annual sales growth is 13.7%, higher than Seagate’s -2.8%, and even growth during Covid is around 1%, on par with Seagate’s . However, for the last quarter, Seagate reported sales growth of more than 30% year-on-year, higher than EW’s 15%. But on an LTM basis, EW’s sales growth is 16.6%, more than Seagate’s 12.1%.

Additionally, EW’s sales growth over the years has been much more consistent compared to Seagate, and we believe this should be rewarded with a higher valuation for EW.

2. Edwards Lifesciences leads on EBIT margins and in a better cash position

EW’s P/EBIT ratio is currently close to 45x, well above Seagate’s 13x. That’s fair since EW’s EBIT LTM margins are 32.7%, well above Seagate’s 16%. In terms of recent margin growth, EW also leads, with LTM’s margin change over the past three years at 10.3%, more than Seagate’s 2.4%. Additionally, Edwards Lifesciences has had more consistent EBIT margin growth than Seagate, and we believe it deserves the higher P/EBIT multiple.

Now, looking at the cash position of the two companies, EW’s debt as a % of equity is around 1%, compared to 21.7% for Seagate. Additionally, EW’s cash as a % of assets is much higher at 22%, compared to Seagate’s 11.5%.

3. Finally, Edwards Lifesciences is ahead in terms of expected returns

Using P/S as a base, due to the large swings in P/E and P/EBIT, we believe Edwards Lifesciences is the best choice. We estimate that EW’s LTM revenue of $5.1 billion is expected to grow at a CAGR of 10.1%, bringing three-year revenue to approximately $6.8 billion. Assuming EW’s P/S ratio returns to an average of around 13.2x, that means the market capitalization would still increase by around 20% over three years to $90 billion.

By comparison, given historical trends, we expect Seagate’s sales to grow more slowly at a CAGR of just 1.6%, bringing revenue in three years to approximately $12 billion. However, considering Seagate’s P/S to correct historical averages of around 1.7x, we estimate a market capitalization of $20 billion for Seagate, well below its current level.

The fillet of everything

While Seagate’s revenues are more than 2x that of Edwards Lifesciences, the latter has experienced steadier and more consistent revenue growth over the years, combined with stronger EBIT margins and a better operating position. Treasury. Our recent performance comparison also favors Edwards Lifesciences, and we believe that EW deserves a higher P/S and P/EBIT multiple over Seagate, due to stronger and more consistent performance, and we believe that the he gap in corporate valuations is only set to widen. As such, we think Edward Lifesciences stock is currently a better bet than Seagate stock.

What if you were looking for a more balanced portfolio instead? here is a quality portfolio which has consistently beaten the market since late 2016.

Return Jan 2022
MTD [1]
YTD [1]
Total [2]
Back EW -2% -2% 308%
Back STX 2% 2% 202%
S&P 500 return 0% 0% 114%
Performance of the Trefis MS portfolio -2% -2% 285%

[1] Monthly and year-to-date cumulative as of 1/5/2022
[2] Cumulative total returns since the end of 2016