Memory chip sales have been down for the last year, but as is usually the case during the industry's cyclical downturns, the shares of many memory chipmakers rose on the expectation that demand will eventually rebound. Such was the case with Seagate Technology (NASDAQ:STX) in 2019. After the stock's price was cut in half in 2018 due to mounting fears that chip sales were petering out, it recovered in dramatic fashion as the downturn showed signs of bottoming out.

STX Chart

Data by YCharts.

As predicted, Seagate's year-over-year results did bottom during its fiscal 2020 second quarter (which ended Jan. 3, 2020), and a return to growth is now on the table for the balance of the year. After last year's big share price rally, those forecasts of rising sales are partially priced in. But with the stock trading at a fair valuation and paying a hefty dividend, it's definitely worth a look.

The quarter in review

Revenue and adjusted earnings fell 7% and 13%, respectively in fiscal 2019, and sales of Seagate's hard disk drives (HDD) are down another 8% through the first half of fiscal 2020. Profit margins on product sold are also down as sluggish demand for digital memory has put downward pressure on pricing across the industry.  

Metric

First Half Fiscal 2020

First Half Fiscal 2019

Change

Revenue

$5.27 billion

$5.71 billion

(8%)

Adjusted gross profit margin

27.7%

30.6%

(2.9 pp)

Adjusted operating profit margin

14.3%

18.1%

(3.8 pp)

Adjusted earnings per share

$2.38

$3.26

(27%)

Free cash flow

$595 million

$571 million

4%

Seagate's fiscal 2020 first half ended Jan. 3, 2020. Seagate's fiscal 2019 first half ended Dec. 28, 2018.  Pp = percentage point. Data source: Seagate Technology.  

The numbers look ugly, but it's important to bear in mind that Seagate notched a sequential increase from Q1 to Q2 -- an important development as its results start climbing again. Quarter over quarter, revenue and adjusted earnings were up 5% and 35%, respectively -- especially impressive results as the three-month period that includes the holidays has historically been a sleepy one for Seagate.  

Plus, the third quarter is looking good too, with management anticipating a return to year-over-year growth. At the midpoint of guidance, revenues and adjusted earnings should notch gains of 17% and 63% -- although the unpredictability of global economic conditions led management to stick error bars of plus-or-minus 7% on both metrics. Either way, though, it looks like a big rebound is in store in Q3, in sharp contrast to the glum report delivered in the prior-year period.

A picture of a cloud surrounded by a bank of computers, illustrating a data center.

Image source: Getty Images.

Data centers, smart facilities, and smart cities on the rise

With its old HDD technology, Seagate is often seen as lagging behind memory tech leaders like Micron, but there is still plenty of room for it to grow its sales. HDDs are cheaper than newer types of digital memory, which makes them a compelling alternative for companies looking to expand their mass-storage capabilities on a budget.

Specifically, Seagate management said it is seeing data center construction start to come back, supporting the ongoing global shift to cloud computing. Its sales into new markets addressing smart facilities (like network-connected manufacturing plants) and smart cities (tech like traffic-surveillance systems) are also gaining traction. These markets are making use of high-definition video, which requires a massive amount of on-premises back-end storage, and Seagate's HDDs are a good fit to provide it.  

That supports the thesis that this stock is a buy, especially considering how quickly the company's bottom line is growing as demand starts to come back. Even though sales are down in 2020 from a year ago, free cash flow (revenue less basic operating and capital expenses) is up 4%. Seagate's free cash flow easily covers its dividend, which currently yields 4.5%, and shares trade for a meager 12.8 times trailing 12-month free cash generation.

In short, if Seagate is able to produce the sales rally it thinks is in the works, this stock looks like one cheap dividend play. I'm a buyer after the fiscal Q2 2020 report.