Has Seagate Hit A Floor?

Seagate Technology PLC STX shares plummeted after the data storage firm's quarterly earnings missed Street view. But, BTIG's Edward Parker says the stock has "hit a floor."

"The next 6-9 months put the stock deep into show-me territory, but our thesis of improved pricing/profit generation against rapidly declining TAM remains intact," Parker wrote.

Parker maintained his Buy rating and $30 price target, while acknowledging the stock would stay down in the near-term as Seagate is realigning operations to cut footprint and boost internal capacity.

Parker continued that gross margins look to be well below guidance (22.5 percent vs. 27-32 percent) until the company cuts excess manufacturing capacity (likely by calendar 2017) in-line with current demand trends. According to the analyst, the current demand calls for 35-40 million units versus Seagate's current production capacity of 55-60 million.

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Though a recovery in cloud capex could result in "modest" improvement in the company's total available market in the second half, the analyst noted that over this period, "margins will likely remain below trend."

"Uncomfortable and likely a tough stretch for the stock, but we truly think this is a floor and we point to strong cash flows given the maintenance-only capex plan," Parker added.

Seagate generated approximately $205 million in operating cash flow and paid cash dividends of $188 million in the three-month period January - March. At the end of the quarter, its cash, cash equivalents and short-term investments totaled approximately $1.2 billion.

Parker highlighted that some of the targeted price increases were successful and sees no structural reason preventing a stable pricing in the industry as stated by CEO Steve Luczo.