Seagate (NASDAQ:STX) and Micron (NASDAQ:MU) both provide crucial components of PCs and data centers. Seagate is the world's largest manufacturer of traditional platter-based HDDs (hard disk drives), and Micron is a major maker of DRAM and NAND memory chips.

Both stocks plunged in 2018 as PC sales decelerated and macro headwinds throttled demand from enterprise and data center customers. However, Seagate and Micron still rallied over 50% and 70%, respectively, this year, as investors spotted signs of a cyclical recovery. Let's see which stock still has more room to run.

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Seagate's strengths and weaknesses

Seagate generated 92% of its revenue from HDDs last quarter. The rest came from sales of enterprise data solutions, SSDs (solid state drives) via partnerships with other memory chipmakers, and other products.

SSDs, which store data on flash (NAND) memory chips, cost more than HDDs but are smaller, faster, more power-efficient, and less prone to damage. Unlike its rival Western Digital (NASDAQ:WDC), which aggressively diversified into SSDs, Seagate focuses on selling higher-capacity HDDs to data center customers -- which often favor cheaper HDDs over pricier SSDs.

Due to cyclical headwinds, Seagate's quarterly revenue fell annually over the past four quarters as its gross margin declined:

Metric

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

YOY revenue growth

14%

(7%)

(17%)

(16%)

(14%)

Gross margin

31.1%

29.9%

26.8%

27.1%

26.7%

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

However, its revenue rose sequentially over the past two quarters, and it expects its revenue to grow 6% sequentially and stay flat annually in the second quarter. It also expects its gross margin to improve as its higher-margin 16TB drives account for a higher percentage of its revenue.

Analysts expect Seagate's revenue and earnings to grow 1% and 2%, respectively, this year, and it regularly spends over 100% of its free cash flow on buybacks and dividends. Its stock trades at just 11 times forward earnings and pays a forward yield of 4.4%.

Micron's strengths and weaknesses

Last quarter, Micron generated 67% of its revenue from DRAM chips, 28% from NAND chips, and the rest from other types of memory chips. Micron controls smaller slices of both markets than market leader Samsung (OTC: SSNLF).

Market prices for DRAM and NAND chips remain near multi-year lows due to a global supply glut and tepid demand from PC and mobile device makers, which caused Micron to report double-digit revenue declines with contracting margins over the past four quarters:

Metric

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

YOY revenue growth

16%

(21%)

(39%)

(42%)

(35%)

Gross margin

59%

50.2%

39.3%

30.6%

27.3%

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

However, Micron's revenue also rose sequentially over the past two quarters. On a sequential basis, its DRAM and NAND revenues rose 2% and 18%, respectively, in the first quarter.

Micron expects its second quarter revenue to fall 10% sequentially and 20% annually in the second quarter, due to seasonally lower demand. Micron expects its gross margin to dip to a midpoint of 27% in the second quarter, which indicates that its price declines are finally bottoming out.

Analysts expect Micron's revenue and earnings to decline 12% and 65%, respectively, this year, followed by positive growth in 2021. The stock looks fairly cheap at 10 times forward earnings, and Micron regularly repurchases shares, though it doesn't pay a dividend.

The better buy: Seagate

Seagate and Micron both look cheap relative to their long-term growth, but Seagate is a smarter pick because it leads its main market, generates better sequential growth, and pays a decent dividend. Micron faces tough competition from bigger rivals like Samsung, isn't generating stable sequential growth yet, and doesn't pay a dividend.