Seagate's Path Will Get Much Tougher From Here; Barclays Downgrades To Underweight

Seagate Technology PLCSTXMark MoskowitzSeagate's stock rating from Neutral to Underweight with a price target slashed from $49 to $40 amid three main concerns.

First, Seagate implemented a cost-cutting initiative in September 2015 where it streamlined manufacturing capacity, exited lower margin businesses and also reduced its headcount, Moskowitz noted. While these actions generated positive results in gross and operating margin improvements these cost-cutting initiatives are mostly completed. As such, any incremental margin boosts will "occur at a sluggish pace" or at the expense of growth (see Moskowitz's track record here).

Second, Seagate is facing intense competition from Western Digital Corp WDC, which is gaining share in the high-margin enterprise drive segment. Meanwhile, Seagate is struggling to reach high yields and fully qualify its 10TB and 12TB high capacity drives as management likely under-invested in the space.

Finally, the likelihood of a Western Digital merger with Toshiba Memory seems more likely now than it has in the past. This could decouple Western Digital from Seagate as a traditional HDD company and could result in investors rotating out of Seagate and into Western Digital.

Bottom line the analyst noted that the downgrade is company-specific in nature as the ongoing concerns could "limit Seagate's relative lift from stronger end markets."

Related Links: Benzinga's Top Upgrades, Downgrades For July 13, 2017 Western Digital: This Should Be A Good Year _______ Image Credit: By No machine-readable author provided. SeanMack assumed (based on copyright claims). [Public domain], via Wikimedia Commons