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This Storage Player Is Not a Good Buy

July 21, 2014 | About:

Seagate Technology (NASDAQ:STX), one of the leading storage companies in the world, is faced with tough times ahead as sales of PCs are declining. Moreover, the company is finding it difficult to keep up the strong momentum it had in 2013. Its core fundamentals such as revenue and earnings are sliding, in light of tough competition from its rival Western Digital (WDC). Hence, should investors consider dumping Seagate and look at a better option such as Western Digital? Let’s check.

Seagate's Woes

The storage company has experienced a slowdown in its cloud storage business that had a huge impact on its revenue and net profit in the last reported quarter. Moreover, Seagate expects an increase in its expenses in the ongoing quarter as it plans to upgrade its products used in mobile devices and servers. Besides, the continuous decline in sales of personal computers is a serious concern for the storage company.

However, Seagate is not the only company that saw soft results in PCs last year, as the PC sales declined nearly 10% in 2013. However, recent news from IDC should boost its confidence as PC shipments are expected to drop only 6% to approximately 296 million this year.

Also, a shift in consumer focus from personal computers to smartphones and handheld devices has resulted in huge losses for Seagate. However, Seagate has benefited in a big way as people have been buying portable disk drives to back up data stored on tablets and smartphones, which is creating significant opportunity for the storage company.

Potential moves

Seagate is executing impressive strategic moves, along with smart investments in its product portfolio that should enhance its vertically-integrated manufacturing capabilities. Further, these vertically-integrated manufacturing capabilities should effectively capitalize on the cloud, mobile, and open source storage trends, driven by data growth.

In addition, the company remains focused on returning 70% of its operating cash flow to shareholders this fiscal year. Seagate has strong cash flow, which it plans to execute effectively on capital allocation strategies so as to maximize the returns of its investments. This reflects that the company is on the right track, and will bounce back in the future with some good numbers on the board.

The Xyratex Acquisition

Seagate is all set to buy fellow data-storage company Xyratex for about $374 million, which will certainly provide a much needed boost to its enterprise data storage systems. The acquisition is expected to add between $500 million and $600 million to Seagate’s revenue in 2015.

In addition, Seagate aggressively wants to tap into the growing demand for products that help store data in the cloud, and is reducing its dependence on personal computer hard drives as consumers shift to smartphones and tablets going forward, which is a healthy sign for investors.

Comparing with Western Digital

But, investors should note that Seagate’s rival Western Digital posted impressive quarterly profit, driven by sales of higher-margin data storage products. Seagate posted a 3% year-over-year decline in drive unit shipments to 56.6 million, or 40% of the addressable market. In comparison, Western Digital’s revenue was up in the previous quarter on a year over year basis, while earnings jumped an impressive 28%.

Moreover, if we compare the stats of both companies, Western Digital comes out on top. Moreover Western Digital is posting growth on both revenue and earnings, and this could benefit investors in the long run.


Seagate is under pressure due to weakness in its cloud business and the slowdown in the PC market. Also, from an investment perspective, we see that it is not a better buy than Western Digital. So, investors should consider selling Seagate and instead invest in Western Digital.

Rating: 4.0/5 (1 vote)



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