Better Buy: Seagate Technology vs. Intel Corporation

Seagate Technology (STX) and Intel (INTC -1.21%) are two major component suppliers for PCs and data centers. Seagate is the world's second largest maker of platter-based HDDs (hard disk drives) after Western Digital (WDC -0.30%), while Intel is the leading maker of x86 CPUs.

Seagate and Intel aren't direct competitors, but they're dealing with similar issues, like soft demand for PCs, sluggish enterprise spending, and macro headwinds like the trade war. Both companies are also considered "mature" tech stocks, which are generally owned for stability and income instead of breakneck growth.

Image source: Getty Images.

Yet the two stocks went in opposite directions over the past five years, as Seagate slipped about 10% and Intel rallied over 70%. Will that trend continue over the next five years?

How do Seagate and Intel make money?

Seagate generated 92% of its revenue from HDD sales last quarter. This core business faces fierce competition from flash memory (NAND) -based SSDs (solid-state drives), which are smaller, faster, more power-efficient, and less prone to damage than HDDs.

SSDs are still pricier than HDDs, so Seagate mainly focuses on selling higher-capacity HDDs to cost-conscious enterprise customers instead of going toe-to-toe with SSDs in consumer electronics like tablets and laptops. The rest of Seagate's revenue comes from sales of enterprise data solutions, SSDs (via partnerships with other flash memory chipmakers), and other products.

45% of Seagate's revenue came from the enterprise market last quarter. 31% came from the edge non-compute (non-PC consumer electronics) market, and 17% came from the edge compute (PCs) market.

Image source: Getty Images.

Intel's "PC-centric" revenue accounted for 51% of its revenue last quarter. This unit generates most of its revenue by selling CPUs for notebooks and laptops. It's been hobbled by Intel's ongoing chip shortage over the past year, which caused several OEMs to buy AMD's (AMD -1.69%) chips instead.

33% of Intel's revenue came from its data center group, which mainly produces Xeon CPUs for servers, while the remaining 16% came from its Internet of Things (IoT), memory chips, programmable chips, and Mobileye divisions. Together, these five businesses comprise the "data-centric" unit, which accounts for nearly half of Intel's revenue.

Which company is growing faster?

Seagate posted four straight quarters of annual revenue declines as its gross margins contracted.

YOY = Year-over-year. Source: Company quarterly reports. *Non-GAAP.

Those declines were caused by a slowdown in PC sales, which was largely attributed to longer upgrade cycles, competition from mobile devices, and Intel's chip shortage. Enterprise demand remained soft, due to cautious spending amid macro uncertainties, and declining NAND prices reduced the price gap between HDDs and SSDs.

Yet Seagate expects roughly flat revenue growth in the second quarter, which indicates that its cyclical downturn is nearly over. That's why analysts expect Seagate's revenue and earnings to both improve about 1% this year.

Intel's revenue growth also slowed to a crawl over the past year as its gross margin gradually declined.

YOY = Year-over-year. Source: Company quarterly reports. *Non-GAAP.

Intel struggled with many of the same macro headwinds as Seagate, but its ongoing chip shortage -- a self-inflicted wound -- allowed AMD (AMD -1.69%) to gain market share in both PCs and data centers.

On the bright side, the growth of Intel's data-centric businesses (boosted by double-digit growth at Mobileye and its memory chips) has been offsetting its poor performance in the PC market. Wall Street expects that balancing act to continue with flat sales growth and 1% earnings growth this year. However, Intel's prospects could brighten next year as it resolves its chip shortage and launches new CPUs to counter AMD.

The valuations and dividends

Seagate and Intel are both cyclical plays that are warming up again. Both stocks also trade at low valuations and pay high dividend yields.

Seagate trades at just 11 times forward earnings and pays a forward yield of 4.3%. Intel has a forward P/E of 12 and a forward yield of 2.2%. Those low multiples and high yields should set a floor under both stocks at these levels.

Seagate and Intel are both fairly safe investments, but I believe that Seagate is a slightly better pick for three reasons: its cyclical rebound is more visible, it faces fewer unresolved conflicts (like Intel's escalating war with AMD), and it pays a much higher dividend.