BOAML Says Seagate Is A 'Longer-Term Winner,' But Reinstates Underperform

In a report published Tuesday, Bank of America Merrill Lynch analysts reinstated coverage of

with an Underperform rating and a price objective of $50. In the report, Bank of America Merrill Lynch noted, "Although we like the company and industry structure, we are concerned around: (1) C1Q, 2Q HDD TAM tracking below expectations; (2) higher relative exposure to PCs that face tougher comps in 2015 especially on corporate desktops; (3) headwinds in client and performance enterprise Hard Disk Drives (HDDs) from Solid State drives (SDDs); and (4) A systems business that is not yet at scale and can potentially create OEM conflicts." "As capacity drives go from 9% to 13% of HDD units and from 21% to 29% of estimated HDD revenue from F15 to F17, we expect Seagate's overall revenues to accelerate to the low-single-digits. However, headwinds from PC units (63% of total) slowing creates incremental risk in the near term," the analysts wrote. "In a move to diversify from HDDs Seagate is moving up the value stack in the last few years, purchasing SSDs and systems businesses (Xyratex for Systems, LSI assets for SSD). That said, the high-growth SSDs/Systems revenue is still a small portion of overall revenues, and we estimate will only be 9% of overall revenues by F2017, despite 20% annual growth," the analysts explained.