Based in Dublin, Ireland, Seagate Technology Holdings plc (STX) is a data storage technology and cloud services provider in the United States and internationally. A solid portfolio of core HDD (hard disk drives) amid the increasing demand for mass capacity storage has bolstered its growth in the fiscal third quarter, which ended April 2, 2021. The stock rallied 74.1% over the past year and 42.9% so far this year.

STX has enhanced its profitability by strengthening its HDD business operations to cater to the growing needs of the data center, cloud, and enterprise customers. Furthermore, the company has presented a strong revenue outlook of $2.85 billion and a non-GAAP EPS outlook of $1.60 for the fiscal fourth quarter of 2021. Given STX’s low valuation and strong growth outlook, we believe it is well-positioned to soar in the near term.

Here is what we think could shape STX’s performance in the near term:

Recent Development

On March 30, STX launched Lyve Data Transfer Services with its fleet of Lyve Mobile shuttles and arrays, to help businesses move massive amounts of data from the edge to the core to the cloud more quickly. The company’s flexible subscription service will allow customers to sign up for its data transfer services to meet their increasing storage capacity needs.

Since STX’s innovative solution is providing a simplified and secured way of transporting mass capacity data, the company is well-positioned to address customers’ emerging needs and drive business growth.

HDD Demand Remains Strong

Although HDD can be considered as an old technology for storing files, given the significantly higher cost of higher-capacity SSD (solid-state drives), it remains a key part of data centers and servers. The global hard disk market revenue is expected to reach $93.88 billion in 2026, growing at a CAGR of 6.5% from 2014. The demand for HDD remains strong because they are more affordable for end-users and are commonly used in personal computers and data centers. Also, now that HDD data storage capacities are growing, it will contribute to higher sales. So, we think STX’s core HDD product portfolio is expected to benefit the company immensely as the massive global data-sphere continues to grow in complexity.

Analysts Expect Solid Growth

The consensus revenue estimate of $2.87 billion for the current quarter, ending June 2021, indicates a 13.9% improvement year-over-year. Moreover, its revenue is expected to rise 20.9% in the next quarter ending September 2021, and 6.6% next year.

Analysts expect STX’s EPS to rise at the rate of 8.2% per annum over the next five years.

Impressive Financials and Profitability

STX’s revenue increased marginally year-over-year to $2.73 billion in the fiscal third quarter ended April 2, 2021. Its free cash flow rose 5.4% from the year-ago value to $274 million, while non-GAAP EPS rose 7.2% from the year-ago value to $1.48. The company reported an operating margin of 14.1% in this quarter, compared to 13.8% in the prior-year quarter. Also, STX’s income from operations came in at $386 million, compared to $376 million in the first quarter of 2020.

STX’s 13% trailing-12-month EBIT margin is 61.2% higher than the 8% industry average. Its net income margin and asset turnover ratio of 9.8% and 1.2% are significantly higher than the industry averages of 4.7% and 0.6%, respectively. The company’s ROE of 87.7% is significantly higher than the industry average of 6.8%. Additionally, STX’s trailing-12-month cash from operations of 1.54 billion compares favorably with the industry average of 128.70 million.

Reasonable Valuation

In terms of non-GAAP forward P/E, STX is currently trading at 16.70x, which is 36.7% higher than the 26.39x industry average. Its forward Price/Sales and Price/Cash Flow ratios of 2 and 14.11 compare with 4.07 and 22.80 industry averages, respectively. Also, STX’s 13.57 forward EV/EBITDA multiple is 20.5% higher than the industry average of 17.07.

POWR Ratings Reflect Promising Outlook

STX has an overall rating of B, which translates to Buy in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. STX has a Growth grade of B, consistent with analysts’ expectation that its revenue and earnings will grow.

Also, in terms of Quality Grade, STX has a B. The company’s high profitability is in sync with this grade.

Click here to see the additional POWR Ratings for STX (Value, Stability, Sentiment, and Momentum).

The stock is ranked #15 of 45 stocks in the B-rated Technology – Hardware industry.

If you’re looking for other top-rated stocks in the same industry, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

STX’s stock surged 80.8% over the past six months. Given its strong financial performance, higher profit margin, and rock-solid growth rates, it is poised to soar further. Furthermore, the company’s newly launched innovative data transfer services to make it easier for businesses to transport mass data from edge to cloud should bode well for the stock. Also, the increasing demand for its HDD should lead to enhanced profitability and higher revenue for the company. So, we believe the stock is a solid pick now.

STX shares were trading at $86.90 per share on Friday afternoon, down $1.92 (-2.16%). Year-to-date, STX has gained 42.10%, versus a 11.72% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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