Why Seagate Earnings Aren't Doomed to Dwindle

Seagate Technology (NASDAQ: STX  ) will release its quarterly report on Wednesday, and its stock has managed to climb to new highs recently. Even with all the fear about the decline of the PC industry, Seagate earnings could well suffer only a temporary hit that will give way to better results once its newer technology takes hold within the industry.

Seagate is one of the biggest hard-drive makers in the business, making it a natural beneficiary of the PC revolution during its heyday. As mobile devices with solid-state drives have started to gain ascendancy over the old-fashioned PC, though, Seagate has had to respond in order to preserve its competitive viability. Let's take an early look at what's been happening with Seagate over the past quarter and what we're likely to see in its quarterly report.

Stats on Seagate

Analyst EPS Estimate

$1.19

Change From Year-Ago EPS

(51%)

Revenue Estimate

$3.42 billion

Change From Year-Ago Revenue

(24%)

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

When will Seagate earnings turn around?
Analysts have kept their views on Seagate earnings roughly unchanged in the past few months, pushing June-quarter estimates higher by $0.01 per share but cutting $0.01 from their fiscal 2014 projections. The stock, though, has kept moving higher, with a gain of almost 40% since mid-April.

The reason for the disparity between Seagate's stock performance and its earnings has to do with valuations. Investors have long anticipated the inevitable demise of the PC hard-drive business, and they've pushed both Seagate's and rival Western Digital's (NASDAQ: WDC  ) earnings multiples into the mid-single digits in anticipation of contracting net income. The rising fortunes of solid-state drive makers Micron Technology (NASDAQ: MU  ) and SanDisk (NASDAQ: SNDK  ) speak to the rapid pace at which the faster storage option has taken hold within the industry.

In response, Seagate has taken action to make itself relevant in the solid-state market. Eschewing the solution that Western Digital chose by making an outside partnership with SanDisk, Seagate has instead created its own hybrid solid-state hard drives to find a middle-ground lower-cost alternative that nevertheless gains some of the efficiencies of solid-state speed. Furthermore, Seagate has come out with its own full solid-state drives to compete against Micron, SanDisk, and other solid-state specialists.

Yet calls for the demise of the conventional hard drive might be premature. Although their use in traditional PCs might be increasingly passe, demand for high-volume, low-cost storage alternatives to help promote "big data" initiatives has driven increased use of hard drives for server applications and data analysis. That business should help both Seagate and Western Digital sustain their hard-drive divisions well into the future, until some other cheap high-volume storage alternative arises.

In the coming Seagate earnings report, watch to see if the company mentions the competitive impact of Western Digital's recent decision to buy solid-state drive maker sTec. With potential acquisition targets of its own to select from, a strategic buyout from Seagate could bolster its position within the increasingly important storage space.

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