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Seagate: This Storage Player Isn't a Good Buy

June 06, 2014 | About:
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kcpl

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Data storage player Seagate Technology (STX) is facing difficulty this year. The company is facing tough competition from rival Western Digital (WDC). The revenue and profit of Seagate declined in the previous quarter on a year-over-year basis, so the company’s shares have taken a beating in 2014.

Seagate’s prospects are not attractive at this time as it is experiencing weaker sales of higher margin disk drives to enterprise customers, and is incurring higher operating expenses. Further, the slowness in sales for the PC market is another concern for the company’s hard-drive business. Let’s analyze whether the company's stock is worth investing as of now or not.

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Seagate is planning to explore other areas to make up for a weak PC market. Hence, the company is focusing on products for mobile devices and servers. Further, Seagate is focusing on strategic acquisitions. So, it materialized the strategy by acquiring Xyratex, which is a leading provider of storage data technology. The acquisition enhanced Seagate’s vertically integrated supply and manufacturing chain for disk drives. Further, the acquisition enables Seagate to expand its portfolio through Xyratex’s industry leading enterprise data storage systems and high performance computing businesses.

Seagate is also restructuring its product portfolio to align its offerings with the emerging trends in mobility, cloud and open source computing. The company has introduced its Kinetic platform and is developing its portfolio of high capacity drives with a six-disk, six-terabyte drive. Going forward, these moves are expected to strengthen its position as Seagate expects its addressable market to grow.

Seagate’s moves are looking to be already becoming effective. The increasing traction for five-millimeter drives in mobile being sold by multiple tablet manufacturers is enabling Seagate to see good response in the mobile segment. Further, Seagate is also focusing on product innovation. Seagate’s latest shingled magnetic recording, or SMR, technology is expected to break density barriers in hard drives and add 25% more capacity to traditional drives. This could enable Seagate to win over more customers in the server and enterprise market due to the low cost of storage and the introduction of higher-capacity hard drives.

Going forward, Seagate is eyeing deepening customer engagement by providing them with more services. Moreover, the increasing demand for large capacity drives is enabling Seagate to add more value to its product portfolio and win more customers in enterprise information technology functions.

Western Digital in the Lead

Seagate’s rival Western Digital is already way ahead of it in the enterprise storage department. Western Digital has expanded its enterprise segment through acquisitions worth close to $1 billion for Virident and sTec. The company shed money on these acquisitions last year and they have started yielding robustly.

Western Digital’s revenue increased almost 4% in the last quarter and its earnings went up 29%. More crucially, the management reported that the enterprise revenue of Western Digital outpaced the industry’s average in the last quarter. Several successful acquisitions by Western Digital have given it a stronger base than Seagate to tap this market. For example, the acquisition of sTec brought in 100 SSD-related patents into Western Digital’s portfolio. Whereas, Seagate’s suffering lower sales to enterprise customer has worsened its condition.

Conclusion

Seagate is struggling against its rival HDD maker Western Digital which has been gaining share. Earlier both companies used to command an identical share of the market, but Western Digital has gone ahead with a 45% share as compared to Seagate’s 40%. Moreover, Western Digital is in a much healthier cash position as compared to Seagate, which should allow it greater freedom to make more acquisitions and ramp up product development.

So, Seagate could continue to lose hare in the storage market, and hence, the investors should stay away from it.


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