Seagate Technology (STX +0.00%), the world's second-largest HDD (hard disk drive) maker, has lost about 10% of its value over the past five years, even as the NASDAQ rallied over 80%. Seagate struggled with the rise of flash-based SSDs (solid state drives), which were smaller, faster, more power efficient, and less prone to damage than platter-based HDDs. Sluggish sales of traditional PCs and uneven demand from enterprise customers exacerbated that pain.
Unlike its bigger rival Western Digital (WDC 5.64%), which aggressively expanded its SSD and flash memory business by acquiring SanDisk in 2016, Seagate focused on selling higher-capacity HDDs to data center customers to meet the rising demands of cloud-based services. Many of these customers prefer HDDs to SSDs because they offer much more storage per dollar.
Image source: Getty Images.
A more conservative approach
Seagate has also focused on smaller acquisitions that cost less than $1 billion over the past five years, including storage systems company Xyratex and software and hardware storage systems supplier Dot Hill Systems. Additionally, it acquired LSI's flash and SSD products from Avago (now known as Broadcom).
As a result, Seagate has low exposure to the flash memory market (which made up less than 10% of its revenue last quarter), insulating it from the recent downturn in NAND prices that torpedoed WD's growth. To boost shareholder value, Seagate has prioritized buybacks and raised its dividend for seven straight years.
Those conservative moves have helped Seagate shares outperform WD stock, which lost more than 40% of its value over the past five years. However, the bears argue that Seagate is merely treading water as the price gap between cheap SSDs and HDDs narrows, and that its revenue base will erode over time.
Looking back at the past five years
Seagate's revenue declined between fiscal 2014 and fiscal 2017 as HDD sales to enterprise customers and PC makers decelerated and SSDs gained ground in multiple markets.
|
Metric |
2014 |
2015 |
2016 |
2017 |
2018 |
|---|---|---|---|---|---|
|
Revenue |
$13.7 billion |
$13.7 billion |
$11.2 billion |
$10.8 billion |
$11.2 billion |
|
YOY growth |
(5%) |
0% |
(18%) |
(4%) |
4% |
Data source: Seagate annual reports. Chart by author. YOY = year over year.
That multiyear losing streak finally ended in fiscal 2018, as PC sales stabilized. However, analysts expect Seagate's sales to decline 5% this fiscal year (which ends in June) and to drop another 1% next year as slower enterprise spending, weaker cloud demand, and macro challenges throttle its growth. The ongoing declines in NAND prices could also hurt Seagate by flooding the market with cheap SSDs.
Image source: Getty Images.
Seagate's gross margin improved significantly over the past two fiscal years as PC and data center sales rebounded. The company also recently reiterated its long-term gross margin target of 29%-33%.
|
Metric |
2014 |
2015 |
2016 |
2017 |
2018 |
|---|---|---|---|---|---|
|
Gross margin |
28.5% |
28.1% |
24.6% |
30.5% |
30.7% |
Non-GAAP basis. Data source: Seagate annual reports. Chart by author.
Meanwhile, Seagate's net income has been extremely volatile over the past five fiscal years, due to its aforementioned acquisitions and slowing HDD shipments.
|
Metric |
2014 |
2015 |
2016 |
2017 |
2018 |
|---|---|---|---|---|---|
|
Net income |
$1.8 billion |
$1.5 billion |
$684 million |
$1.2 billion |
$1.6 billion |
|
YOY change |
(14%) |
(14%) |
(55%) |
80% |
31% |
Non-GAAP basis. Data source: Seagate annual reports. Chart by author. YOY = year over year.
Analysts expect Seagate's non-GAAP earnings per share to fall 7% this year, but rise 1% next year. Over the next five years, they expect its annual EPS (buoyed by buybacks) to grow at an average rate of 6%, compared to annualized declines averaging 10% at Western Digital.
Check out the latest Seagate earnings call transcript.
The next five years
Investors should always be skeptical of long-term forecasts. But we can safely assume that over the next five years, Seagate will keep shipping traditional HDDs with higher capacities for cloud customers while repurchasing its shares and raising its dividend.
Seagate will also carefully expand its SSD business by acquiring chips from Toshiba's former memory unit, which a Bain Capital-led consortium of companies (including Seagate) acquired last year. Seagate also procures chips through partnerships with memory chipmakers Micron and SK Hynix.
This slow and steady approach should insulate Seagate from the cyclical headwinds that battered Western Digital's flash business over the past year. However, if NAND prices recover over the next five years, WD should generate stronger growth than Seagate, although higher NAND prices will also prevent SSDs from cannibalizing the market for high-capacity data center HDDs.
Seagate should be able to keep selling bigger HDDs at lower prices than SSDs to enterprise customers, which could keep revenue roughly stable while enabling steady returns for shareholders. That balancing act can't last forever, but it probably won't fail within the next five years.
