Seagate Technology: Hard Disk Drive Weakness Still Not Over (NASDAQ:STX)

Seagate Hard Drive Maker Announces Cut 3,000 Jobs

Justin Sullivan

Seagate Technology Holdings plcNASDAQ: STX) position in the storage industry, we continue to be a hold on the stock. We expect demand for STX’s main source of revenue, Hard Disk Drives (“HDDs”), to continue to weaken due to stabilization. PC needs post-epidemic and cloud balancing and enterprise storage costs. The stock is down about 30% since our time decrease in mid-June. We expect further declines ahead and recommend investors wait on the sidelines until HDD demand recovers.

The following chart outlines our STX stock price history.

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Seeking Alpha

More HDD vulnerabilities to be priced into

STX derives most of its revenue from its HDD product line, accounting for 87% of total revenue in 1Q23. Our bullish view on the stock is based on our belief that HDD demand will continue to weaken into 1H23. STX’s 1Q23 earnings report showed HDD revenue down 26% sequentially and 38% Y/Y to $1,722M. We believe STX’s decline in HDD revenue is from temporary demand weakness and customer inventory adjustments.

The following table outlines STX’s revenue by product line for 1Q23.

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Scheduled report for STX Q1FY23

We don’t believe the injury is over yet. We expect STX to continue to underperform due to two factors:

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1. Normalizing PC market demand

HDDs have traditionally been used for PCs and smartphones, but recently, these two markets are replacing HDDs with faster and faster Solid State Drive (SSDs) storage. HDDs are still widely used in PCs, so we attribute part of STX’s HDD revenue decline to lower demand from its PC or legacy markets. STX’s legacy business volume shipped declined 11% sequentially and 47% Y/Y in 1Q23. We believe the company is feeling pressure from consistent PC demand in the post-pandemic environment. Gartner reported global PC shipments declined by 19.5% Y/Y in 3Q22. We do not expect STX to enjoy the same demand in its legacy markets as it did during the crisis. We also believe SSDs are outstripping HDDs in the PC space. We expect continued weak demand to maintain STX’s near-term revenue growth.

2. Balancing cloud and enterprise storage costs

Cloud and enterprise storage costs take the spotlight as STX’s largest high-end markets, but HDD sales in this arena are also on the decline. STX’s revenue was down 25% sequentially and 21% Y/Y in 1Q23. We attribute the consistent demand on the cloud and the presence of industry expenses to the extreme economic conditions. We believe smaller customers are choosing to invest in the cloud and spend as inflation and interest rates increase. 88% of STX capacity shipped in 1Q23. Our bearish view on the stock is based on our belief that STX will continue to see HDD weakness from its main strength markets into 1H23.

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The following charts outline STX’s revenue growth trend between 1Q22-1Q23.

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Scheduled report for STX Q1FY2023

He is not alone in his weakness

STX is feeling the pressure of weakening storage demand along with a broad group of semiconductor peers. In August, StorageNewsletter reported that HDD shipments declined 15% last quarter. While STX experienced a double-digit decline due to lower HDD demand, so did its competition. Toshiba (TOSBF, TOSYY) is experiencing a similar 15% consecutive drop in shipping capacity. Western Digital Corp (WDC) also saw softer demand for HDDs, with HDD revenue falling from 2,128M in 4Q22 to 2,014M in 1Q23. We expect global storage demand to remain weak until economic headwinds ease.

Assessment

STX is very cheap, but we expect more fields to be calculated in the stock. On a P/E basis, the stock is trading at 15.2x C2023 EPS $3.52 compared to the peer group average at 20.1x. The stock is trading at 1.9x EV/C2023 Sales versus a peer group average of 4.7x. While the stock is trading well below its peer group, we do not recommend investors buy the stock on weakness just yet. We believe the weak HDD weakness will continue and advise investors to wait on the sidelines until the downside risk is triggered.

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The following table outlines STX’s value compared to its peer group average.

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TechStockPros

Talk on Wall Street

Wall Street shares our bearish view on stocks. Of the 26 analysts who have reviewed the stock, seven are buys, 18 are hold ratings, and the rest are sell ratings. The stock is currently trading at $53 per share. The average selling price target is $60, while the mean is $58, with a potential 10-13% upside.

The following tables outline STX’s sales volume and price target.

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TechStockPros

What to do with stocks

STX stock is down about 53% YTD and 30% since our downgrade. We believe STX faces the need to adjust due to weak PC markets in the post-disaster environment and slower cloud and enterprise storage spending due to economic headwinds. We don’t see HDD demand recovering in the near future and recommend investors wait for a better entry point on Seagate Technology Holdings plc.

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