UBS Cuts Seagate Outlook, Reiterates Sell And 33% Downside

UBS’ John Roy reiterated a Sell rating on Seagate Technology PLC STX, while lowering the price target from $26 to $24.

Estimates Lowered

Given the weakening HDD demand, the PC unit estimates for C16/17 have been lowered. The estimates were lowered following supply chain meetings in Asia, along with unfavorable FX and high inventory levels.

“The PC downside coming from desktops hurts HDDs as the vast majority of desktops still use HDDs rather than SSDs,” Roy mentioned, while stating that the F16/F17 HDD TAM estimates has also been lowered.

HDD Weakness

The PC market accounts for 55-60 percent of the company’s units, and with the meaningful weakening in this market, combined with the growing popularity of SSDs and all-flash arrays in notebooks, HDDs are likely to continue to weaken.

“Even the bullish argument that cloud data centers will take more share from the enterprise misses the point that those nearline HDDs going into AWS and Azure are replacing high-end enterprise drives—not a good thing for Seagate,” according to the UBS report.

Analyst John Roy believes that steps by the company to move beyond HDDs have so far been inadequate, and that the declining demand and absence of a robust SSD strategy could lead to a decline in the share price.

Although the stock is currently supported by a 7 percent dividend yield and $1.3 billion in share buybacks in FY2016, persisting HDDs declines would make these insufficient to support the share price.