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A Safe Tech Stock at a Value Price

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It's not often I carry conviction when it comes to a technology stock. I find the sector nearly impossible to predict, subject to all sorts of technical shenanigans, and just plain stressful compared to the simple, cash-generating businesses in the manufacturing and consumer goods sectors. As for this tech company, though, a blend of solid company fundamentals, a misunderstood industry, and favorable valuations has this value guy genuinely interested.

Conservative technology
No, that's not a buzzword from the Republican National Convention, but it usually is an oxymoron. Tech investments are typically for the bold, the forward-thinking, and the risk-takers. I have been known to frequently break the speed limit and I live in California, but when it comes to investing -- I'm about as boring and risk-averse as it gets. I know you don't care about my investing philosophies, but I mention my technophobic tendencies because I have developed a strong conviction in Seagate's (Nasdaq: STX  ) ability to enrich shareholders. The company, which could be considered more of a consumer goods play than technology, is a true outperformer. And even though it has already made a big run, and David Einhorn may be looking for the exit, I believe this hard-drive manufacturer hasn't stopped its upward trend.

A good year
A near 200% return in one year is pretty stellar for a mature company in any sector. Seagate was the beneficiary of a supply chain disruption in Thailand, which crippled competitor Western Digital (Nasdaq: WDC  ) and allowed Seagate to do its best to fill the shelves with hard drives priced at full retail and not a penny under.

Though that little honeymoon period is over, and Western Digital has recovered faster than expected, Seagate still has big opportunities ahead of it and a value price to sweeten the deal.

Let's do this a little backwards and address the concerns most investors have about Seagate one by one:

PC (lack of) demand
It's true, PCs are officially out of vogue. The rise of tablets and all things Apple has PC makers like Dell (Nasdaq: DELL  ) scrambling to keep the numbers up. While I am not comfortable enough to comment on the future of PCs (remember, I don't do tech), I find that this concern in regard to Seagate's hard drive business is illegitimate.

To compete with the ultra-premium Apple products, Dell and its friends are constantly trying to drive the price of a PC down to the level that consumers almost have to buy one because it is so cheap. In creating the cheapest PC possible, you won't see Dell or Hewlett-Packard rushing to adopt the solid state drives, or SSDs, used in tablets and Macs. They are far, far too expensive for a value-priced computer. So, while the death of PCs may be on the calendar for a few years down the road, I believe the last ones on the production lines will be outfitted with a Seagate or Western Digital-made hard drive.

Another point made by Seagate bears is that the move to mobile and the hard drive-less world is the elephant in the room. Again, I would agree this is the trend, but Seagate has a way around this issue as well. SSDs, which are used in mobile products, are still incredibly expensive and demand is outpacing supply. Until prices find a way to come down and suppliers can match the need, manufacturers and consumers alike will likely prefer cloud storage, as it is far cheaper and a trendier form of data storage.

Seagate's cloud presence, driven by a major acquisition earlier this year, is substantial and will only benefit from the continuing growth of the industry -- mobile included.

The industry environment for Seagate is debatable, but in my opinion is advantageous (see above). As far as the fundamentals go, though, this company is in top shape.

I could go on about the strength of the balance sheet and the manageable debt load, not to mention the drastic operating income growth over last year, but what is most interesting is the company's relentless stock buybacks. For years the company has been aggressively buying back stock, and the plan is to take another 250 million shares off the table over the course of the next two years. With 400 million shares currently outstanding, that is a very substantial buyback. Why would the company do this?

Management must strongly believe the company is undervalued.

Bears may argue that it's a move to boost earnings statements, but the company isn't in need of such dire tactics.

Overall, a safe bet
Hard disk drives, though a fading technology, are not going anywhere over night. Seagate and Western Digital will continue to provide those products until the day they go extinct. And when the fat lady sings her last HDD song, Seagate will already be floating in the clouds.

For another tech stock our analysts believe will greatly benefit from a growing trend, check out this free report.

Fool contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter @MikeyLewy. The Motley Fool owns shares of Western Digital. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 08, 2012, at 4:42 AM, samsonmq wrote:

    "Management must strongly believe the company is undervalued."

    Yet the insiders kept selling!

  • Report this Comment On September 08, 2012, at 7:52 AM, Trainman1965 wrote:

    Hard times are just around the corner for HDD manufactures. As soon as prices for SSD's start falling (they will sooner than you think) HDD demand will fall off a cliff. Do you remember 5-1/4" floppy drives, 3-1/2" high density diskettes? HDD's will be added to this list very soon.

  • Report this Comment On September 10, 2012, at 9:35 PM, JungleGent wrote:

    Good post, Michael. I enjoyed reading it. I think your analysis and predictions are accurate. It totally helps to know that an ultra-conservative, I-don't-do-tech guy actually LIKES this stock. I'll definitely buy some STX now!

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