Longbow: Windows 10 Details 'Read Cautious'

In a report published Tuesday, Longbow analyst Joe Wittine maintained a Neutral rating on Seagate Technology PLC STX, after Microsoft Corporation MSFT formally announced the release date for its Windows 10 OS.

Microsoft announced an earlier-than-expected release date for Windows 10 of July 29. Analyst Joe Wittine believes that this does not appear to have "the juice to drive a material 2H PC hardware refresh" that would significantly boost the PC businesses of Seagate and Western Digital Corp WDC.

"While our models appear amply conservative by intentionally not building-in any significant 2H PC recovery (we model 2H PC HDD units down ~15% y/y and 2H PC HDD sales down 20%+ y/y), a tepid Win10 event could still be a negative sentiment event for the stocks, particularly STX which qualitatively talked-up Win10 optionality on its late-April call," Wittine wrote.

The Win10 upgrade will be available only to those PCs that currently have Win8 or Win7. This means that PCs running Vista would be "candidates for forced refresh."

In the report Longbow noted that the Neutral rating reflects ongoing risk through:

• Uncertainty on the ultimate growth and profitability of the systems business, as illustrated by Seagate's substantial opex guide-up revealed on the January call
• Further risk to consensus, with Seagate maintaining a constructive tone on 2H builds in enterprise, and even PCs on a Windows 10 catalyst
• Ongoing HDD share losses within the PC category
• Consensus that has consistently been too aggressive on share repurchase and operating expense assumptions

Analyst Joe Wittine maintained a Buy rating and a price target of $110 on Western Digital. Although HDDs weakened significantly during the first half of the year, "today’s guide-down sets up a playbook similar to 12 months ago, namely waiting for the 2H seasonal improvement in PCs, gaming, and enterprise demand."

Wittine considers Western Digital as "the best way to play the secular build-out of the Cloud’s infrastructure." While hyperscale buildouts appear poised to grow in the second half, Longbow's model remains "very conservative."