Will AI Demand Continue To Drive Seagate Stock Higher?

+18.86%
Upside
99.11
Market
118
Trefis
STX: Seagate Technology Holdings logo
STX
Seagate Technology Holdings

Seagate stock (NASDAQ: STX) has seen a 60% rise in value since early January 2023 – jumping from levels of $64 then to $102 now – vs. an increase of about 42% for the S&P 500 over this period. In comparison, its peer – Western Digital stock (NASDAQ: WDC) – has seen a 2x rise over this period. Both companies are seeing a recovery in storage demand, amid the AI boom. The rise in STX stock can primarily be attributed to a significant 177% rise in the company’s P/S ratio to 3.2x now, versus 1.2x in 2022. Our dashboard on Why Seagate Stock Moved has more details.

Investors have rewarded STX stock, thanks to the rebound in its sales of storage products and expansion of profit margins lately.  However, the increase in STX stock lately has been far from consistent, with annual returns being considerably more volatile than the S&P 500. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could STX face a similar situation as it did in 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? We estimate Seagate’s Valuation to be $118 per share, reflecting over 15% upside from current levels of around $100. The company’s P/S ratio has been in a wide range of 1.2x to 3.3x in the past three years. This can be attributed to a significant 37% fall in sales in fiscal 2023 and another 11% in fiscal 2024 (fiscal ends in June), owing to lower volume and price erosion amid a significant decline in storage demand. Our forecast of $118 is based on 2.7x forward expected revenues of $44 per share. The 2.7x figure is slightly higher than the stock’s average forward P/S ratio of 2x seen over the last three years. We think a rise in valuation multiple now makes sense, given the rebound in demand and strong expected earnings growth in the coming years.

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Seagate is now focused on Heat Assisted Magnetic Recording (HAMR) products, which could last for a much longer life than that of the conventional disks. It is shipping hard disks of 30 TB with the new HAMR technology. With the demand expected to pick up for HAMR disks, Seagate is well-positioned to benefit from the same. AI is driving demand for memory and storage to support increased data-processing. The company stands to benefit from its mass-capacity drives, given the rising need for enterprises to capture more data.  Seagate has also seen its profitability improve lately. Its operating margin fell from 14% in 2021 to 1% in 2023, but recovered to 6% in 2024. Going forward, operating margin is expected to improve further.

We expect Seagate’s revenue to rise at an average annual rate of around 21% from $6.6 billion in 2024 to $11.3 billion in 2027. Also, its adjusted earnings per share is  expected to surge a whopping 8x from $1.29 in 2024 to over $10 in 2027. Investors have also rewarded the stock with a higher valuation multiple, but is it worth picking now? We think so. We believe that the positives around AI demand and mass-capacity storage solutions are not fully priced in for Seagate. Notably, the average analyst price estimate of $116 for STX also reflects nearly 15% upside, implying that the stock has more room for growth.

While STX stock looks like it may see higher levels, it is helpful to see how Seagate’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Sep 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 STX Return 2% 21% 278%
 S&P 500 Return -3% 15% 146%
 Trefis Reinforced Value Portfolio -5% 7% 699%

[1] Returns as of 9/10/2024
[2] Cumulative total returns since the end of 2016

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