Deutsche Bank: Seagate Is A Mixed Bag, Long-Term Tailwinds But Immediate HDD Sales Weakness

The sales of HDD units peaked in 2010 and have been declining since then. Deutsche Bank’s Sidney Ho believes that the HDD industry is transitioning from a unit-driven industry to a capacity driven industry. Although this creates several near term challenges, it will drive long-term benefits and boost revenue growth in the future, Ho added.

Limited EPS Upside

Ho downgraded Seagate Technology PLC STX from Buy to Hold.

The analyst believes that while the company is well positioned to benefit from longer term positive HDD industry trends, near-term HDD sales declines would limit its earnings upside.

Seagate Technologies’ EPS is expected to decline from $4.56 in 2015 to $2.51 in 2016, and rise to $3.35 in 2017.

HDD Industry To Witness Consolidation

The HDD market has witnessed significant changes over the past few years, with some traditional markets embracing NAND and new markets emerging, which value capacity at a low cost.

“We see both technologies as complementary over the longer term, with HDDs as the preferred storage medium for capacity, while NAND and SSDs will win when speed and footprint are highly valued,” Ho wrote.

While HDD unit sales are not expected to grow again, industry consolidation, more modest ASP declines, and a positive mix shift to higher value HDDs in the cloud and for capacity applications, are expected to lead to long term revenue growth.

“In the near term, the negative impact from declines in the PC market are too severe to be offset by these positive trends, but as we near 2020, these positive drivers should lead to stabilizing sales,” the Deutsche Bank report stated.

Ho expects the high profit levels of the HDD industry to persist and support robust capital returns to shareholders.