I thought Seagate Technology (NASDAQ:STX) would have fared better in the last year during the coronavirus pandemic. Don't get me wrong, the stock price is up nearly 20% since I initially bought shares a couple of years ago, and the dividend (currently yielding 4.3%) was a nice bonus along the way. However, while its sales have been resilient in uncertain times, profit margins are under pressure and the most recent financial guidance left me wanting more.

Ultimately, Seagate's stock isn't exactly cheap anymore, and I think there are better opportunities elsewhere in the electronics hardware universe -- in spite of that high-yield dividend payout.  

A resilient hardware technology play

I don't want to take too much away from Seagate here. My thesis that it would be a resilient digital memory hardware play during the COVID-19 crisis has played out. As management explained on the last earnings call, revenue increased 2% year over year during calendar year 2020. Through the first half of the company's 2021 fiscal year (the six months ended Jan. 1, 2021), sales were down only 6% to $4.94 billion.

Someone working inside a data center.

Image source: Getty Images.

Enterprise customers looking for an affordable mass-storage solution turned to Seagate's hard disk drives (HDDs), especially for storage of video and imaging within the data center industry. Strong seasonal sales of PCs during the holidays also provided a boost for Seagate. The company's 18-terabyte HDD also started shipping at the end of 2020, and a 20-terabyte HDD is on the way for enterprise customers. Though revenue in the last quarter was down nearly 3% from a year ago, the top-line print of $2.62 billion was slightly above the midpoint of management's guidance a few months ago.  

Metric

Three Months Ended
Jan. 1, 2021

Three Months Ended
Jan. 3, 2020

Change

Revenue

$2.62 billion

$2.70 billion

(3%)

Adjusted gross profit margin

26.8%

28.7%

(1.9 pp)

Adjusted operating profit margin

14.7%

15.7%

(1.0 pp)

Adjusted earnings per share

$1.29

$1.35

(4%)

Free cash flow

$314 million

$286 million

10%

Data source: Seagate Technology. Pp = percentage point.  

Why I'm selling anyway

Seagate did say it started to see a more widespread increase in demand for its HDDs during the final few months of 2020. However, the company is experiencing pricing pressure as older digital memory tech like HDDs is being commoditized by newer technology like solid-state drives (SSDs). This is showing up in profit margins, which have yet to begin recovering from the trough last year. Free cash flow (revenue minus cash operating expenses and capital expenditures) was up in the last quarter, but it was less than the amount of cash returned to shareholders via the dividend and share repurchases. As a result of that situation, Seagate's cash and equivalents were $1.8 billion (compared to $1.72 billion last summer), but debt increased to $5.12 billion (compared to $4.16 billion last summer).

The return of cash via dividend and share repurchases is nice, but obviously not sustainable. The immediate-term outlook remains very foggy, too. Fiscal 2021 third-quarter revenue guidance was for $2.65 billion, plus or minus $200 million (which would be down 2.6% year over year at the midpoint); and adjusted earnings per share of $1.30 plus or minus $0.15 (down 5.8% year over year at the midpoint). Little in the way of robust rally in sales is implied, unlike memory chip giant Micron Technology (NASDAQ:MU) -- which I also own.

I still plan on keeping an eye on Seagate as 2021 plays out. The company may yet show signs of renewed demand for its HDDs as its enterprise customers resume normal spending habits in the wake of the pandemic. As of right now though, no rally is forthcoming. And at 15 times trailing-12-month free cash flow, this isn't quite the same value stock it was last spring when I predicted it would be just fine during the pandemic. It did do just fine in the midst of the COVID-19 disaster, but it isn't growing either. I think there are better ways to bet on a semiconductor and tech hardware rebound at this point, so I plan on selling for a small profit and moving on to greener pastures.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.