Stagnant Revenues Could See Seagate Stock Shed Around 15%

Seagate stock (NASDAQ: STX) is up almost 60% since the beginning of 2021, and at the current price near $96 per share, we believe that Seagate stock has over 15% potential downside.

Why is that? Our belief stems from the fact that Seagate stock is up almost 2.5x from the low seen in March 2020. Further, after posting mixed Q3 ’21 numbers, it’s clear that demand for Seagate’s products has not recovered to levels before the pandemic. Our dashboard What Factors Drove 149% Change In Seagate Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

Seagate stock’s rise since late 2018 came despite a 6% drop in revenues, from $11.2 billion in FY 2018 to $10.5 billion in FY 2020 (Seagate’s fiscal year ends in June). Net margins dropped from 10.6% to 9.6% over this period, and combined with a 9% drop in the outstanding share count, this led to EPS (earnings-per-share) falling from $4.10 in 2018 to $3.83 in 2020.

Seagate’s P/E (price-to-earnings) ratio rose from 9x in 2018 to 16x by 2020 end, but has risen to over 25x currently, riding the rally in technology stocks. However, given Seagate’s mixed Q3 2021 results, there is possible downside risk for Seagate’s multiple.

So what’s the likely trigger and timing to this downside?

The global spread of coronavirus and the resulting lockdowns in early 2020 saw a drop in demand for external memory devices, and this impacted demand for Seagate’s products. However, demand has picked up since, but this has not really benefited Seagate’s business. This is evident from Seagate’s results for Q3 2021, where revenue came in roughly unchanged at $2.73 billion vs $2.72 billion for the same period last year. Operating income rose marginally to $386 million from $376 million, and a slightly lower effective tax rate (2.9% vs 5.3% in Q3 2020), saw EPS rise from $1.23 to $1.41.

With work-from-home becoming the new norm, it is likely that demand for external memory devices will stay low in the near to medium term, as cloud storage is a much better option. As cloud storage does not account for a significant share of Seagate’s sales yet (mass capacity applications combined make up a little over 65%), demand growth for the company’s products could remain low in the near to medium term, and this will likely weigh down profitability. We believe the stock will see its P/E multiple decline from the current level of 25x to around 21x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $80 in the near term, a downside of more than 15% from the current price of $96.

While Seagate stock may be overvalued, it is helpful to know how its peers stack up. Seagate Stock Comparison With Peers summarizes how Seagate compares against peers on metrics that matter. You can find more such useful comparisons on Peer Comparisons.

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