A Big Upgrade for Seagate Technology

After spending much of the past six months at a less-than-impressive three-star rank, Seagate Technology (Nasdaq: STX  ) has impressed enough top-performing members of our 170,000-strong Motley Fool CAPS community to climb all the way up to four stars. A total of 1,125 members have given their opinion on the disc drive maker, with many of them offering analysis and commentary explaining the recent optimism.

Many CAPS members have been strongly tempted by Seagate's valuation lately. Along with rival Western Digital (NYSE: WDC  ) , Seagate's stock has been beaten down to a mid-single-digit earnings multiple that's even tempting many bears to have a closer look. Much of the recent declines in share price stem from fears of a slowdown in PC sales -- Intel (Nasdaq: INTC  ) recently lowered its third-quarter guidance on weaker than expected PC demand while hard drive chip maker Marvell Technology (Nasdaq: MRVL  ) saw lagging PC sales in the second quarter, too. Demand concerns also prompted UBS to cut its rating on PC giant Hewlett-Packard (NYSE: HPQ  ) , one among many of the industry leaders expected to be negatively affected by the trend. Yet while the market pessimism has taken its toll on Seagate's shares, analysts still estimate a five-year annual growth rate of nearly 12%.

A number of investors also recognize threats from growing technologies like flash memory and solid-state drives coming from aggressive memory peers such as SanDisk (Nasdaq: SNDK  ) and STEC (Nasdaq: STEC  ) . But Seagate is working on technology development of its own and pushing further into the enterprise SSD market. And despite the near-term PC hurdles, Seagate sees added long-term growth potential from cloud computing, which it sees as a big source of future demand for storage. Market intelligence firm IDC backs up this message as it states that storage is the fastest-growing cloud computing service, and Seagate expects this trend to trigger a big jump in storage demand in the coming years. With the company's current share price packed with plenty of near-term pessimism, many CAPS members like the upside potential.

Do you think Seagate Technology deserves its raised status? Add your thoughts in the comments box below on this page, or head over to CAPS to rate the company and check out all the information and opinions the community offers, absolutely free.

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Fool contributor Dave Mock recently upgraded his scooter with a flashy buggy whip. He owns shares of Intel, which is an Inside Value recommendation. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Intel and Marvell Technology Group. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool's disclosure policy doesn't try to read tea leaves, especially since there's no writing on the leaves.


Read/Post Comments (9) | Recommend This Article (7)

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  • Report this Comment On September 24, 2010, at 2:17 PM, jrmart wrote:

    Listed below is an email I sent to Jim Cramer of Mad Money. I sent him this because Jim Cramer and lots of other people just don't understand the complexities of a Enterprise/Cloud Computing SOLID STATE DRIVE. It's not easy to develop this kind of drive and it could take Western Digital and Seagate several years to so. These companies would be better off buying STEC.

    Cramer, when are you going to dig down deep and give us the REAL STORY about STEC in the enterprise/cloud computing data storage arena? Cramer, why haven’t you mentioned the potential PIN ACTION from STEC? You talk about 3PAR and CONCURRENT for data storage. You also continue to mention your expertise in the old spinning COMMODITY hard drives from companies like Seagate and Western Digital. Todays enterprise/cloud solid state drives from 3PAR and CONCURRENT are a sophisticated combination of FLASH MEMORY/SOFTWARE from STEC and third party proprietary management software from 3PAR and CONCURRENT. It takes between 12 to 18 months after companies (STEC, Western Digital, Seagate, Hitachi) introduce one of these sophisticated combination of flash memory and software solid state drives before they are allowed to be placed in service in the mission critical enterprise/cloud computing data storage arena. STEC has a very big lead in this very special multi billion dollar enterprise/cloud computing data storage marketplace. They manufacture and hold the patents for the FLASH MEMORY/SOFTWARE in their ZEUS solid state drives that they supply to 3PAR and CONCURRENT. Unfortunately many of the manufactured negatives about STEC that the shorts provided over the last year, and the media glom on to, were NOT TRUE. STEC has sold over 200 million of their first generation ZEUS SOLID STATE enterprise/cloud computing drives to companies like 3PAR, EMC, IBM and CONCURRENT in a marketplace that can potentially be worth over 10 billion by 2014. Granted, others like Western Digital, Hitachi, Seagate, etc. will enter this very lucrative marketplace, but if you use the analysis that STEC has a 12 to 18 month lead on them, and already has major ZEUS customers like IBM, EMC, 3PAR and CONCURRENT, etc, STEC could easily capture a substantial part of this potential multi-billion dollar enterprise storage market. Also, cloud computing is growing by leaps and bounds and will require lots of enterprise solid state storage devices because of their critical response speed. Companies like Apple use Me.com to automatically keep your mail, contacts, calendars, photos, videos, music, etc. in the cloud. They also use push technology to keep everything in sync across your iPhone, iPad, Mac, PC, and the web wirelessly. So no matter where you go, or which device you use, all your information is up to date — WITH NO DOCKING REQUIRED. Could Apple be using enterprise solid state devices in their MobileMe cloud? CRAMER PLEASE WAKE UP, the old spinning drive world is rapidly going away and STEC is in the best position to increase their ZEUS sales in this MULT-BILLION cloud/enterprise storage marketplace. STEC just introduced their 2nd generation ZEUS drives, while all their competitors are still writing white papers on their VAPORWARE solid state enterprise/cloud computing solid state drives. STEC’s lead in this marketplace is REAL, and is also a key changing event in data storage.

    Why would anyone invest in Seagate and Western Digital that produce old, slow response time, energy hungry drives that require lots of air conditioning.

  • Report this Comment On September 24, 2010, at 5:03 PM, FoolSolo wrote:

    Look, anyone who understands the technology and has been around companies with large IT operations for a while knows that HDD technology is years, if not decades, away from being replaced with SSD. Disk drives are going to be around for many years to come, they are cheap, reliable, fast and nowadays they are much smaller and consume much less power than before. For most companies that have years of data spinning in their data center, SSD is not even on their radar, and for those that have looked at SSD, it is primarily to augment existing round/brown/spinning storage, not to replace it. Anyone who thinks SSD is going to replace the billions of terrabytes of data currently stored on disk drives throughout corporate America is just poorly informed, or simply overinvested in SSD and hoping for a miracle. Similarly, it will be multiple years or longer before PCs are shipped without a spinning HDD in their case. When you compare storage cost on disk drives to that on SSD, you'll see why very few are tossing their HDD and replacing them with SSD, because it doesn't make economic sense. And we haven't even talked about the storage hungry digital music revolution, High Def video, and dozens of multi-media applications that require terrabytes of data for breakfast.

    Here's a good example for you to keep in mind; about 3 months ago I bought a new palm-sized HD video recorder before we went on our summer vacation in Italy. Not wanting to haul tapes or CDs around, I went with a flash storage based camera, which is small, takes less power, etc. Well, when we came home from vacation, I had over 30GB of video and pictures. Guess where that data went? On a brand new 1-Terrabyte external HDD I bought for $110 so I could do video editing. This new 1-TB drive is in addition to the existing 5 smaller external drives and the 1-TB internal drive I already have for my home computing. That's right, I don't measure my home storage in GBs any more, I measure it in TBs. Most of my drives are from WDC, which one of the reasons why I bought WDC stock. The other one is a 160GB drive from Seagate, which I bought about 2 years ago, and it has a 5-year warranty. Guess what, my digital music collection used to be on this Seagate drive, but it is not big enough for my collection any more, so the 1TB is doing the job (for now).

    Does any of this sound familiar? Do you know of anyone who is not going through the same kind of consumption of terrabytes of HDD storage?

    While I do think SSD storage will continue to grow, they have two major challenges to overcome before they make big gains. First, the cost has to get cheaper to compete with HDD, so this will continue to erode profits for SSD companies. Secondly, they have drive capacity much higher to handle the major storage needs we are familiar with. For my vantage point, it appears to be WDC and STX will adapt nicely to SSD, and I would even expect that SSD and HDD will soon be married into hybrid solutions (we already have HDDs with growing cache sizes).

    I'll take some more of that WDC and STX stock, thank you very much.

  • Report this Comment On September 24, 2010, at 6:18 PM, jrmart wrote:

    Apple is well on its way to selling over 21 million IPADS, while PC's are selling like we are in a depression. I also use flash for all my digital cameras, but unlike you, I back up and SYNC all my information, movies, videos, photos, songs, emails, contacts using ME.COM, Apples Cloud for less than $150 a year. This service covers my 2 Apple IPHONES, my 2 IPADS and my IMAC. Please understand the difference between what you do and I do. No matter where I'm at, or what Apple device I'm on, they all are updated real time wirelessly. So when I make a change on one, it is immediately available on all my other Apple devices. That is the difference between operating in the old PC world of cheap commodity disk drives, 1TB for $110, or in the new Apple WIRELESS DISKLESS WORLD. Western Digital and Seagate both operate in the price competitive commodity hard drive market, while STEC sells into a HIGH PROFIT niche market that will be worth well over 16 billion by 2014.

    You're trying to compare a cheap commodity PC hard drive market with a sophisticated SOLID STATE ENTERPRISE/CLOUD COMPUTING market where it takes several years to design a flash/software enterprise/cloud computing solid state drive to store critical information. You are right about one thing, old markets tend to survive long after the technology becomes obsolete. Good luck in your investment strategy.

  • Report this Comment On September 24, 2010, at 7:12 PM, traviswright wrote:

    Solid state drives sound like a good idea until you understand the reality of the supply chain that is required. Today, the storage industry produces about 250,000 Petabytes of storage per year. That is expected to double by 2014, and solid state drives currently make up for less than 1% of all storage delivered to the market. To even make a dent in this market, the semiconductor industry would need to build 20 megafabs to produce the flash memory. There are only a couple megafabs globally under construction at any point in time, and I am here to tell you, if a semiconductor company is going to plunk down $4B to build a fab, it is not going to be for a low margin commodity like SSD flash. The semiconductor industry cannot support a SSD take over of the storage industry. Sorry, guys, you are stuck with old spinning drives for at least a decade.

  • Report this Comment On September 24, 2010, at 7:20 PM, flashfinancials wrote:

    Apple buys flash memory directly, not through SSD makers. If you want to play on Apple as a trend, buy Sandisk or MIcron, not STEC.

    Cloud? Me.Com? They use server farms, which, for the vast majority of their data, use HDD's. Tying STEC in with a "cloud" trend requires some tortured logic.

    The SSD enterprise market will likely grow over time, and WDX and STX will develop hybrid products that help their customers transition to hybrid solutions - low cost HDD for the large majority of data, and high cost SSD for applications that need high speed.

    STEC is having an ugly year financially, while the rest of the tech world is doing quite well. Invest cautiously. You can choose a 3~4 PE with STX or WDX, or buy in at a ~25 PE with STEC. Do they warrant a PE of 25?

  • Report this Comment On September 25, 2010, at 12:23 PM, jrmart wrote:

    Apple's solid state drives for the IPAD come from SANDISK, but beware, these solid state drives are just commodity products that can potentially come from other companies. Apple is now forecasting an 18 BILLION dollar QUARTER while PC sales are acting like we're in a depression. On Aug 24 Apple closed at $240. One month later, yesterday, Apple closed at $292. Apple likes to use solid state drives, so don't think it's tortured logic when I mention STEC Zeus drives potentially being used in ME.COM. When you continue to look in the rear view mirror and use outdated numbers, you could miss many upcoming great opportunities. The street is expecting STEC to come in with a 69 million dollar quarter, while STEC is forecasting 80 million with over 50% of that coming from their sophisticated Enterprise/Cloud Computing Zeus drives, unlike the solid state drives from SANDISK, these drives take 12 to 18 months to get approved. If you really want to play an Apple trend, buy LQMT.PK for .70 a share. In an 8-K filed on August 9, 2010, it was disclosed that Apple (AAPL) secured specific intellectual property rights from Liquidmetal Technologies (LQMT.) in exchange for a licence fee. This gives Apple exclusive rights to commercialize the product in the field of consumer electronics, while Liquidmetal will retain the right to market it in all other fields. The product is Liquidmetal, and it could help make an extremely sleek and aesthetically pleasing IPhone that is virtually non-distructable. Liquidmetall is currently being used in a variety of applications, including medical devices, tooling, Department of Defense (that is probably the reason Apple negotiated lifetime licensing rights instead of buying this small company..too much paperwork and restrictions from big brother) and in high-end watches and sporting goods. When Apple reports next quarter, we will find out just how much they paid for this license. Speculators are saying that Apple paid off all of Liquidmetals Technologies debt. All I know is that the stock shot up from .12 in July to $1.70 when Apple announced the license agreement in August. Since then the stock has settled back between .55 to .75 a share.

  • Report this Comment On September 27, 2010, at 7:13 AM, Neverfoolproof wrote:

    Fast Flash memory Card (class 10)costs >$100 for 32 Gigabytes while a $100 can buy you a 1000 Gigabytes and much faster hard drive. To say flash memory will replace hard drive is the same as saying mopeds will replace trucks in delivering large quantities of goods! Massive data storage requires many hard drives that uses Terabytes (1000 GB) as the starting unit.

  • Report this Comment On September 27, 2010, at 3:06 PM, mirecek78 wrote:

    I was invested in both - STEC and WDC. I sold all my STEC shares for a small profit a few months ago as I concluded that STEC was just too damn dangerous for my taste. As far as WDC goes, I can buy their SSD's if I want to today - they have SSD capacities and the are producing SSD's already. So this way, I feel like I am not giving up on SSD's, but at the same time, I am invested in a company with great track record, pristine balance sheet and very favorable ratios. My personal experience with both WDC and STX harddrives made me go with WDC stock vs. STX. Also, STX, as far as I know, doesn't have those SSD capacities mentioned. ...just my 2c. :)

  • Report this Comment On September 29, 2010, at 3:03 PM, FoolSolo wrote:

    @jrmart

    Where do you think ME.com stores their data? On SSD? Not a chance! And your comment on Enterprise Cloud computing.... do you think the private and public clouds out there are driving SSD sales, or do you suppose they're buying more Disk? I can tell you that my corporate data is not sitting on SSD. We currently have about 150TB spinning in our corporate private cloud, and another 250TB in our customer SaaS private cloud. All of it sits on round/brown/spinning media, and not one byte is on SSD. Not only that, but we add about 20-30% more every year.

    Read the numbers, WDC continues to improve its margins, increase its revs, and has built a cash horde of more than $2.5 Billion, yet their PE is just 4.6, trading at just 1.3 x book value, and only 0.65 x sales. They're generating cash like mad.

    I'm not taking anything away from SSD or flash memory, they have their place in the market too, and I think they have a good growth story also. But the way you make it sound is like "DISK is dead, and SSD is king". I disagree, so I've been quietly adding to my WDC holdings after their recent pullback to $24-25, and I'm already seeing the gains. I expect there will be much more for few more years, and then who knows? I would not put organic memory out of the picture, and I would not rule out hybrid solutions and other moves WDC can make with their big cash holdings.

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