Here's Why Investing in Seagate Is a Bad Idea

Seagate has started the year badly, and it could get into more trouble despite its efforts.

Apr 17, 2014 at 2:30PM

Data storage player Seagate Technology (NASDAQ:STX) has had a rough go this year. The company is losing market share to rival Western Digital (NASDAQ:WDC), and its financial performance is also on the decline. Seagate's revenue and profit were down in the second quarter on a year-over-year basis, so it's not astonishing to see that the company's shares have taken a beating in 2014.

Seagate's prospects don't look appealing right now as it's seeing weak sales of higher-margin disk drives to enterprise customers and is incurring higher operating expenses. Further, the weakness in the PC market is another concern for the company's hard-drive business.

Exploring other options
Seagate is looking to explore other areas to make up for a weak PC market. The company is focusing on products for mobile devices and servers. In addition, Seagate is focusing on strategic acquisitions. Hence, it acquired Xyratex, which is a leading provider of storage data technology. With this acquisition, Seagate has enhanced its vertically integrated supply and manufacturing chain for disk drives. Also, the acquisition enables Seagate to expand its portfolio through Xyratex's industry-leading enterprise data storage systems and high-performance computing businesses.

Seagate is also focusing on restructuring its product portfolio in order to align its offerings with the emerging trends in mobility, cloud, and open-source computing. The company has launched its Kinetic platform, and is expanding its portfolio of high capacity drives with a six-disk, six-terabyte drive. Looking ahead, because Seagate expects its addressable market to grow, these moves will help it in strengthening its position.

It looks like Seagate's moves are already becoming effective. The company is seeing good response in mobile as its five-millimeter drives are being sold by multiple tablet manufacturers. In addition, Seagate is also focusing on product innovation. The company expects its latest shingled magnetic recording, or SMR, technology to break density barriers in hard drives and add 25% more capacity to traditional drives. The introduction of higher-capacity hard drives can help Seagate win over more customers in the server and enterprise market due to the low cost of storage.

Seagate is also looking to deepen customer engagement going forward by providing them with more services. Also, due to the increasing demand for large-capacity drives, Seagate is working on adding more value to its product portfolio and winning more customers in enterprise information technology functions.

Difficult to get ahead of Western Digital
However, Seagate's rival Western Digital is already on the forefront in the enterprise-storage department. Western Digital has bolstered its enterprise segment through acquisitions such as Virident and sTec. The company spent close to $1 billion on these acquisitions last year, and they have started yielding solid results.

Western Digital's revenue was up almost 4% in the last quarter, and its earnings increased 29%. More importantly, Western Digital's enterprise revenue outpaced the industry's average in the last quarter, according to management. The company's acquisitions have given it a stronger base than Seagate to tap this market. For example, the sTec acquisition brought over 100 SSD-related patents into Western Digital's fold. On the other hand, Seagate struggled due to lower sales to enterprise customers.

Bottom line
Seagate has been struggling, while rival HDD maker Western Digital has been gaining market share. Both companies used to command an identical share of the market, but Western Digital has inched ahead with a 45% share as compared to Seagate's 40%. Moreover, Western Digital has a stronger cash position when compared to Seagate, which should allow it more freedom to make more acquisitions and ramp up product development.

Seagate may continue losing share in the storage market. This is the reason why investors should stay away from it.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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