Technological integrations have become a vital part of almost every industry these days. Common everyday items -- including washers, watches, and even clothing -- have become advanced enough to collect data about our personal lives for storage and later analysis. With all this new data being generated (through a trend often referred to as the Internet of Things), a growing demand has arisen for a place to store it all. That is where Seagate Technology (STX +0.00%) hopes to benefit.
Seagate researches, manufactures, and distributes data storage technology and storage solutions to a wide variety of customers. Because of a widespread and growing need for data storage, Seagate has developed into a huge player in the data storage industry. As it continues to grow its bottom line in line with this growing demand, is now the time to add this stock to your investment portfolio? Let's take a closer look.
Image source: Seagate
Worldwide data storage shortage is only growing
It isn't widely publicized but, for the last decade or so, global data storage manufacturers have not been able to meet the overall demand for storage.
In 2019 alone, there was a demand for 30,800 exabytes (1 exabyte = 1 million terabytes) worth of data storage and only 19,800 exabytes were supplied. That translates to a 43% gap between supply and demand. In 2020, the supply gap is expected to rise to 53%, leaving a storage shortage of 17,900 exabytes of data.
For Seagate, this shortage is a huge advantage thanks to its cost-effective and durable solutions for both commercial and consumer products. Current customers in the server industry will continue to purchase enterprise-level capacity drives, while regular consumers will see lower hard drive prices -- both of which Seagate specializes in. In the very large hard drive segment, for example, Seagate has a respectable market share of about 41%. This is only 5 percentage points less than the leading competitor Western Digital's 46% share of all hard drives sold. Toshiba is the (distant) third competitor in this field, with a 13.3% share.
Assuming that Seagate can maintain its current market share, just the organic growth in storage demand shown by the supply gap data should result in a substantial increase in data capacity sold. This is helped by the fact that Seagate has four different enterprise-level data storage solutions that make up the bulk of its data capacity sales. What makes these enterprise-level hard drives such a hot seller is that each of the four is engineered for a specific type of data storage/management. So with Seagate hard drives, businesses have the flexibility to choose between versatile, speed optimized, durable, and smart secured storage options. Most of Seagate's competitors do not offer as many data specific enterprise storage solutions, with the closest competitor being Western Digital's Enterprise Gold and Ultrastar DC HC600 series drives.
One would think that this increase in data capacity sales would lead to higher revenue. The issue with this theory is that increased efficiency and competition within the data storage industry has actually resulted in falling prices. Basically, more sales being made but at reduced prices that don't necessarily translate to increased revenue. Although Seagate may not be able to take additional advantage of the hard drive market, it may be able to increase exposure in newer markets, such as solid-state storage, to make up for revenue stagnation in the hard drive sector.
Flat revenue, but a better bottom line for Seagate
Despite revenue being relatively flat over the past four years, Seagate has posted larger net profits each and every year. It has done this, in part, by getting research and development (R&D) costs under control as well as lowering selling, general and administrative expenses (SG&A). Here is how Seagate has benefited since 2016:
| 2016 | 2017 | 2018 | 2019 | Increase (Decrease) From 2016-2019 | |
|---|---|---|---|---|---|
| R&D expenses | $1.24 billion | $1.23 billion | $1.03 billion | $991 million | (21%) |
| SG&A expenses | $635 million | $606 million | $562 million | $453 million | (33.4%) |
| Net income | $248 million | $772 million | $1.18 billion | $2.01 billion | 156% |
Data source: Seagate Technology
Of course, other factors affect net income like other operating expenses and income tax expenses. For the most part, though, operating expenses at Seagate have fallen considerably. Investors should look for Seagate to continue lowering costs as certain storage technologies become cheaper and more efficient to produce.
Where is all the net income going?
Seagate issued its first dividend back in 2004. It paused dividend payouts during the worst of the Great Recession, between 2009 and 2011, but has kept the dividend payments steady and growing ever since. Its latest annualized payout was $2.54 a share and represented a yearly dividend yield of 4.27%.
That relatively high dividend yield is even at a time when the stock is just $8 short of its all-time high of $66 per share. Some of the price rally from December 2018 lows of $38.59 a share can be traced back to a $2.8 billion stock buyback program launched in November 2018. Throughout 2019, the buyback program was still ongoing and Seagate has repurchased $894 million so far. There is still about $2 billion worth of stock repurchases still planned, according to management.
So is Seagate Technologies a buy?
Buying this stock at the moment comes down to your investing philosophy. For long-term investors, Seagate is a definite buy. It has a generous and generally reliable dividend, a stable balance sheet, and a chance for continued growth.
If you are someone looking for a short or mid-term investment, Seagate may not be the answer. Seagate stock is already trading just shy of its all-time high and its price tends to fluctuate heavily on any U.S.-China trade war news. Any escalation in the trade war is bound to harm Seagate's share prices in the short term. If you currently have any Seagate shares, it is still a good idea to hold on to them as there is room for price appreciation.
