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Seagate (STX) Rises More Than 4%: Can the Rally Continue?

Zacks

Seagate Technology Plc’s STX shares have added about 4.1% in yesterday’s trading session, outperforming the market.

In the last year, its shares have gained 41.4%, while the industry recorded growth of 31.7%.

Will the recent positive trend continue driving the stock over the long haul or is it due for a pullback? Before we discuss how investors and analysts have reacted as of late, let's take a quick look at the fundamentals and trends in order to get a better hold on the important drivers.


Growth Drivers

Seagate recently announced preliminary results for the second quarter of fiscal 2018. The storage solutions provider expects higher revenues and margins in the quarter due to greater demand for its HDD products and operational efficiencies.

It now expects revenues to be approximately $2.9 billion compared with an increase of 3-5% guided previously. The Zacks Consensus Estimates for revenues is pegged at $2.74 billion. The improvement can primarily be attributed to strong growth in exabyte demand.

The company expects exabyte shipments to be roughly 88 exabytes, which reflects drive shipments to be around 40 million and average capacity per drive to be approximately 2.2 terabytes.

Moreover, non-GAAP gross margin is anticipated to be 30%. Further, operating expenses on a non-GAAP basis are projected to be in the range of $390-$444 million. Previously, the company expected non-GAAP operating expenses to decrease 2-3% with cost cutting initiatives.

According to Dave Mosley, Chief Executive Officer of Seagate, “Our revenue growth and strong portfolio profitability in the December quarter reflect solid demand for high-capacity mass-storage solutions, particularly for our cloud-based environments.”

Another factor that bolstered share price was Seagate’s agreement with Toshiba, per which the latter will provide Seagate with NAND supply, consequently helping in innovation of hard disk drives (HDD), solid state drives (SSD) and hybrid solutions. This will improve competitive position in the flash memory market.

Seagate is also gaining from the increasing adoption of its Nearline HDDs. We believe that Nearline’s rapid adoption will boost Seagate’s competitive position against Western Digital.

Further, the company’s efforts in the improvement of areal density with the ramping up of its heat assisted magnetic recording (HAMR) technology are a catalyst.

Notably, with the huge transformations in the storage industry mobile cloud is taking the center stage. This in turn has provided a boost to the deployment of high-capacity mass storage products, which is beneficial for Seagate.

Upward Estimate Revisions

In the last seven days, the Zacks Consensus Estimate for Seagate's current quarter and current year witnessed upward revisions. For the current quarter, the Zacks Consensus Estimate is currently pegged at $1.27 per share, up from earnings of $1.15 per share earlier. Similarly, the Zacks Consensus Estimate for current year is currently pegged at $4.28 per share compared with $4.06 projected seven days ago.

Style Scores Look Great

Micron currently sports an A grade for Value, Growth and Momentum, lifting its overall VGM score to A.

Valuation

On the valuation front too, the stock looks attractive. The company currently trades at a forward P/E multiple of 11.0x, significantly lower than the industry average of 16.4x. The ratio, which is obtained by dividing a stock’s current market price with its historical or estimated earnings, measures how much an investor needs to shell out per dollar of earnings. Consequently, lower the P/E of a stock, the better for investors.

Outlook

Notably, the stock carries a Zacks Rank #2 (Buy). The company outpaced the Zacks Consensus Estimate in three of the trailing four quarters, delivering a positive average earnings surprise of 2.5%. Additionally, the stock has long-term earnings per share growth rate of 18.9%.

To Conclude

In our opinion, the stock deserves a place in investor’s portfolio and we are expecting an impressive return from the stock in the next few months.

Some other top-ranked stocks in the broader technology sector include Applied Materials, Inc. AMAT, NVIDIA Corporation NVDA and Broadcom Limited AVGO, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Applied Materials, NVIDIA and Broadcom have a long-term expected EPS growth rate of 12.7%, 10.3% and 13.8%, respectively.

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