Is Seagate Technology Stock a Buy Now?

Share prices of Seagate Technology Holdings (STX -1.84%) tumbled 8% on July 22 after the hard-drive maker posted its fourth-quarter results. Its revenue declined 13% year over year to $2.63 billion, broadly missing analysts' estimates by $160 million. Its adjusted net income fell 24% to $355 million, or $1.59 per share, which also missed Wall Street's expectations, by $0.30.

In the first quarter, Seagate expects its revenue to decline anywhere from 15% to 25% year over year, and for its adjusted EPS to tumble from 32% to 49%. Analysts had only expected its revenue and earnings to decline by 4% and 6%, respectively. Those headline numbers were terrible, but could Seagate be turning into a value play after shedding nearly a third of its market value this year?

Image source: Getty Images.

Understanding Seagate's business

Seagate is the world's largest manufacturer of traditional platter-based hard disk drives (HDDs). It controlled 44% of the HDD market in the first quarter of calendar 2022, according to Coughlin Associates, while its closest competitor, Western Digital (WDC -0.67%), held a 37% share.

Over the past several years, HDDs have been disrupted by flash-memory-based solid state drives (SSDs), which are smaller, faster, more power efficient, and less prone to damage than platter-based drives. However, SSDs are still more expensive than HDDs with the same capacity. 

Seagate and Western Digital dealt with that market shift in different ways. Seagate continued to focus on developing higher-capacity HDDs for enterprise and data center customers, pivoted away from lower-capacity consumer HDDs, and sold a lower number of SSDs. Seagate didn't produce its own memory chips for those SSDs; it sourced them from Kioxia, formerly known as Toshiba Memory, instead. 

Meanwhile, Western Digital aggressively expanded into the SSD market by acquiring SanDisk and other flash chipmakers. Today, WD generates more than half of its revenue from flash memory chips and SSDs.

Seagate's comparatively conservative approach insulated it from the memory market's cyclical headwinds, and enabled it to generate plenty of cash for buybacks and dividends. Over the past 10 years, it reduced its share count by nearly 50%. The stock currently pays a forward dividend yield of 3.4%.

Tracking Seagate's slowdown

Seagate's revenue rose just 1% to $10.5 billion in fiscal 2020, which ended in July of the calendar year, as its adjusted EPS declined 4%.

But in fiscal 2021, its revenue rose 2% to $10.6 billion as its adjusted EPS increased 14%. That acceleration seems minor, but it indicated that Seagate's simple focus on producing cheaper, high-capacity drives for cost-conscious customers still generated slow and sustainable growth.

Seagate's revenue rose 9% to $11.7 billion in fiscal 2022 as more data center and cloud customers expanded their storage capacity. Its gross and operating margins expanded, and its adjusted EPS jumped 45%. But if we break down Seagate's quarterly growth rates, the cracks start to appear:

Data source: Seagate. YOY = year over year.

Seagate's year-over-year revenue growth actually decelerated over the past few quarters -- and finally turned negative in the fourth quarter -- as its gross and operating margins fell sequentially. Its outlook for the first quarter indicates that the slowdown will intensify throughout fiscal 2023.

Intensifying headwinds and very few tailwinds

Seagate mainly attributed that slowdown to sluggish demand for consumer-facing PCs and external drives, as well as COVID-19-related disruptions in Asia, shortages of non-HDD components indirectly throttling its sales to certain markets, and intensifying inflationary headwinds.

During the conference call, CEO Dave Mosley said that in response to those macro challenges, Seagate would reduce its manufacturing and cut costs to maintain a "favorable pricing environment."

That slowdown will likely continue as the macro headwinds intensify and the PC and cloud markets endure tough slowdowns after the peak of the pandemic. Both of those markets had benefited from tailwinds throughout the pandemic as more people worked remotely and accessed more cloud-based services.

Analysts had expected Seagate's revenue and adjusted EPS to decline 6% and 15%, respectively, in fiscal 2023. However, those estimates could be too optimistic based on Seagate's latest warning.

There are better dividend stocks to buy

Seagate's stock only trades at 12 times forward earnings, but it's getting cheaper because it faces a tough cyclical slowdown. Its yield looks attractive, especially considering that Western Digital no longer pays a dividend. But plenty of other blue chip tech stocks pay comparable dividends while facing milder macroeconomic headwinds. Therefore, Seagate had a great run last year, but it will likely remain out of favor this year.