Wells Fargo On Seagate Technology: 'PC, Data Center & Cloud To Drive Results But Valuation Full'

In a report published Thursday, Wells Fargo looked into Seagate Technology PLC STX and its growth potential, and changed its valuation range from $55-$65 to $59-$67. The firm maintains a Market Perform rating for the stock, and a Market Weight rating for the broader IT Hardware industry, implying it expects both to perform in-line with the broader market over the next 12 months.

Despite the limited bullishness, Wells Fargo’s FQ2 estimates remain above the

Street, driven by its expectation “for benefits from solid PC demand, cloud spending following a soft H1, and subsystem strength.” As the report develops, the analysts go into these three elements.

The research firm sees a stabilizing PC market as one of the main driver’s for Seagate’s expansion. However, in the shorter-term, we should expect a slowdown as it enters the slower seasonal timeframe -- same as gaming consoles.

Related Topic: Longbow Research Analyst: Samsung-Seagate Buyout Rumor Is 'Highly Improbable'

Improving cloud demand (which seems to be recuperating after a slow firs half of 2014) is also expected to drive growth and margin expansion.

Finally, the analysts pointed out that they like the subsystem business’ strategy, as it continues to gain strong traction and benefits from secular trends. “Customers are evaluating their architectures and looking at more cost effective cloud-based and as-a-service solutions, which utilize raw disk and de-featured hardware. The market is still in the early stages but STX is aggressively looking to capitalize on the opportunity by cost effectively providing simple solutions. STX has a competitive advantage from a margin perspective, given the margins are accretive to STX, whereas dilutive to the traditional vendors. While we like this business, investments could limit near-term leverage.”