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Is Seagate an Ideal Investment Candidate?

August 19, 2014 | About:
Riddhi Kharkia

Riddhi Kharkia

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The declining demand in the PC market had a negative impact on hard-drive makers such as Seagate Technology (STX) and Western Digital (WDC). However, the recent reports from IDC suggest that things are looking up for PC demand and this makes the case of these hard-drive makers pretty interesting. Now, in order to combat the slowdown in PC demand both these companies tried their hands into new revenue opportunities including the cloud, data centers and mobile devices. This transition, however, isn't proving to be easy. When Seagate released its fourth-quarter results, it posted yet another year-over-year decline in revenue and earnings.

For the fourth quarter, the company reported revenue of $3.301 billion compared with $3.425 billion in the same quarter last year, representing a decrease of 3.6%. Adjusted earnings per share of $1.10 were 8.3% below the same quarter last year's non-GAAP EPS of $1.20. Seagate has also lost market share to rival Western Digital in the storage industry, and this has added to its troubles. However, Seagate managed to satisfy consensus estimates when it released results, and its outlook was at par with expectations. The company has been taking steps to improve its long-term prospects through its new product lines and technology, and it seems to be making good progress.

On cloud nine?

Seagate has built a solid portfolio of cloud storage solutions. Its cloud systems and solutions segment is driven by three product lines – OneStor systems, ClusterStor and Evolve. The good thing is that the company saw good demand in this segment in the previous quarter with revenue exceeding its internal target. Seagate singled out ClusterStor, its high-performance computing business, as the outstanding performer with 210% revenue growth in the previous quarter. ClusterStor is gaining traction in the oil and gas and health care verticals, along with the government sector for big data deployment. The company claims to have equipped ClusterStor with the world's fastest data analytics engine, which has enabled it to find adoption in data-intensive applications.

Meanwhile, the Evolve product line turned in a solid performance, landing five deals over the half-million-dollar-mark. Looking ahead, Seagate expects revenue from this product to increase further, driven by a higher average selling price and stronger demand.

The inorganic style

Seagate made a smart move earlier this year by acquiring Xyratex, and it seems to be reaping the benefits now. The acquisition has allowed it to bolster its high-performance computing business and gain more expertise in cloud-based storage technology, thereby allowing it to post strong results in the cloud business.

Now, Seagate is on the verge of closing another acquisition. The company announced in May that it will acquire Avago Technologies' SSD controller and PCIe assets. This is another good move as the solid-state drive (SSD) industry is growing at a fast pace. According to IHS iSuppli, global SSD shipments are expected to increase to 227 million units in 2017 in PCs, from only 31 million units in 2012. SSDs will end up accounting for a third of the storage market by 2017 so it is important for Seagate to continue building its technology portfolio in this product line.

Improving PC prospects

In accordance with the reports from IDC, the company also expects better demand in the second half of the year. In fact, Seagate is seeing one of its best demand trends in four years, with reports that July fared better than normal.

As per analysts, the PC refresh cycle, which was triggered after Microsoft ended support for Windows XP, and increasing demand from corporate customers are the reasons behind the improved prospects.

Being a hard-drive supplier, Seagate's prospects are directly tied to the PC industry. Additionally, Seagate has prepared a new line of products to tap the PC market. For instance, its 7200 RPM notebook product has gained qualification at all major original equipment manufacturers, and a production ramp is on the way. Shipments of Seagate hybrid drives are also improving, with the top three global PC makers offering it in their main product lines.

Takeaway

Seagate's recent results indicate that the company is on track to get better. Its investments in cloud technologies and the increasing adoption of its products by customers should result in long-term improvements. Moreover, at a trailing P/E of just 13 and a forward P/E of less than 10, Seagate is very cheap when compared to the industry average, making it a good value play.

About the author:

Riddhi Kharkia
A practicing Chartered Accountant based out of India. I have keen interest in analyzing tech stocks that are driven by value.

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