Seagate Technology (STX)

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Factors That Can Trigger Movement In Seagate's Stock Price

Apr. 2, 2015 2:52 PM ET | About: Seagate Technology (STX), Includes: WDC

Summary

We forecast Seagate’s laptop HDD units to rise from 73 million units in 2014 to about 79 million by 2017 and then gradually decline to under 75 million through the end of the decade.
We currently forecast desktop hard drives shipped by Seagate to decline from about 73 million units in 2014 to 62 million units by the end of our forecast period.
We have a $58 price estimate for Seagate, which is about 10% higher than the current market price.

Hard drive manufacturer Seagate Technology (NASDAQ:STX) has witnessed a tough environment for PC and laptop hard drive sales in the last few years owing to weak global IT spend and declining PC/laptop shipments. A large chunk of the desktop and laptop market has been cannibalized by the penetration of smartphones and tablets, which use flash-storage instead of traditional spinning disk hard drives. However, the penetration of SSDs in the consumer market is still limited, with hybrid drives (SSD-based cache memory coupled with standard hard drives) gaining popularity. As a result, we expect hard drive manufacturers including Seagate and Western Digital (NASDAQ:WDC) to continue to reap benefits in the PC and Laptop storage market in the coming years.

On the other hand, enterprise customers have switched over to flash-based storage at a much faster rate than individual end-users, since the requirement of high-end storage is more apparent for cloud storage or in data centers. The prices of flash storage have declined significantly over the last few years driven by significant demand. Although prices for SSDs are expected to continue to fall, they still likely won’t be as cheap HDDs in the next few years. As a result, Seagate and Western Digital have focused on cheaper alternates to flash storage for enterprise and cloud customers with innovative products such as helium-filled drives and the Kinetic Open Storage Platform. These products are still in nascent stages, and the success of these alternates to SSDs would depend on the long-term customer response.

There is still some uncertainty around the rate of adoption of Seagate’s products and popularity among the end-users or enterprises, which suggests that there is room for stock price movement depending on how the results turn out in the few years. Below we look at a few potential scenarios, and the potential impact on the company’s stock price.

PCs Switch To SSDs Sooner Than Expected (-10% Stock Price Impact)

Seagate has often downplayed the importance of pure SSDs (especially in the consumer market) in the past and focused on alternatives such as hybrid drives that use flash-based storage as cache memory riding on top of a HDD. The company did not bet big on SSDs mainly because they are not cheap enough to attract volumes. Moreover, with the current rate of decline of SSD prices, manufacturing them at a mass scale does not currently seem like a viable option. As a result, the company is focused on delivering solid state hybrid drives (SSHD) and cheaper traditional spinning disk hard drives in the consumer market. As a result, we forecast Seagate’s laptop HDD units (including both SSHD and HDD) to rise from 73 million units in 2014 to about 79 million by 2017 and then gradually decline to under 75 million through the end of the decade. We expect unit shipments to decline post-2017 since SSDs will eventually start becoming adopted on a larger scale.

Similarly, we currently forecast desktop hard drives shipped by Seagate to decline from about 73 million units in 2014 to 62 million units by the end of our forecast period. This decline corresponds to IDC’s forecast for falling global PC shipments. Additionally, as SSDs become more relevant in the consumer market, the unit shipments for SSHDs and traditional HDDs are likely to suffer even more. If the industry-wide adoption of pure SSDs happens sooner than anticipated, the decline in PC and laptop HDDs could be steeper for hard drive manufacturers. This is also likely to reduce average selling prices for HDDs and put pressure on margins. If desktop and laptop HDD units shipped by Seagate decline to 55 million and 63 million units, respectively, the average selling price per unit falls by about 5-6% per unit and the adjusted gross margin for the PC and Laptop division is compressed by just over a percentage point through the end of the decade, there could be a 10% discount to our price estimate for the company.

Enterprise And Cloud Storage Switches To SSD Alternatives (+10% Impact)
Seagate’s enterprise storage division caters to businesses and institutional clients, with its storage products designed for mission critical and nearline applications. The market for mission critical enterprise storage solutions has grown at a rapid pace over the last few years, as cloud-based storage has shifted consumers away from storing data locally. Additionally, the number of data centers which need to maintain backups of data and information on servers, and the number of large businesses that require high-end data storage, have risen significantly over the years. Accordingly, enterprise-grade hard drives are manufactured to withstand high workloads and deliver optimum performance for long periods of time. However, flash-based or SSD storage is increasingly becoming a an integral part of data centers or cloud storage.

SSDs have various advantages over spinning disk HDDs such as better performance, low latency, higher durability, less vulnerability to mechanical shock, less power consumption and lower cooling requirements. As a result, SSDs and all-flash arrays are increasingly becoming the preferred option for enterprises and data centers. Needless to say, the price per GB for SSDs is still significantly higher than HDDs. To bridge the price gap, Seagate has introduced cheaper alternatives to SSDs such as shingled magnetic recording (SMR) drives, the Kinetic Open Storage Platform and heat-assisted laser drives.

We currently forecast Seagate’s enterprise and cloud storage unit shipments to rise from 33 million units in 2014 to 55 million units, and the average price per unit to increase from $124 per unit to $138 per unit by the end of our forecast period. If the alternatives to SSDs play a key role in the coming years and gain popularity among enterprise clients, it could boost product sales for Seagate. If the unit shipments rise to about 64 million units, with the average selling price rising to about $150 through the end of our forecast period, there could be a 10% upside to our price estimate for the company.

We have a $58 price estimate for Seagate, which is about 10% higher than the current market price.
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