Pacific Crest Downgrades Seagate Amid Share Loss

• Seagate Technology PLC STX shares have been highly volatile over the past three months, and have lost 12 percent since July 16.
• Pacific Crest’s Monika Garg downgraded the rating on the company to Sector Weight.
• Seagate preannouncement was negative, reflecting a decline in sales and share compression in the nearline segment, Garg mentioned.

Seagate preannounced negatively on account of a decline in the sales of higher-capacity [nearline] drives. The company also lowered its non-GAAP margin projection to 24 percent, from the previous guidance of 27 percent.

Seagate indicated that the demand for 4TB and 6TB nearline drives in the quarter had been less than expected. Since nearline drives carry the highest margins, lower sales of these adversely impacted the company’s margins.

Analyst Monika Garg commented, “Seagate announced its 8TB drive in September, which is more than four quarters behind Western Digital. The faster-than-expected shift to 8TB drives is adversely impacting Seagate, in our view.”

Seagate’s preliminary results indicate HDD TAM of 117 million units, which is marginally above the guidance of 113-115 million.

While Seagate has set its EPS growth target for F2016 at 10 percent, Garg believes that this is unlikely to be achieved, even though the company is controlling its expenses this year.

She explained, “Since nearline drives have the highest margins and it could take some quarters for Seagate to catch up in this segment, its margins could be adversely affected in F2016. Also, we expect HDD units to be down 14% y/y in F2016 due to lower notebook sales and the increasing impact of flash on notebooks, leading to lower utilization.”

The EPS estimates for F2016 and F2017 have been reduced from $4.36 to $3.96 and from $5.03 to $4.76, respectively.