Credit Suisse Analyst Forecasts Weak 4Q Results for Seagate Technology and Western Digital Amid Ongoing Storage Market Weakness

Credit Suisse analyst Shannon Cross previewed 4Q23 results for Seagate Technology Holdings PLC STX and Western Digital Corp WDC, with the companies reporting July 26 and July 31, respectively. 

The analyst maintained her Neutral ratings but reduced Seagate's target price to $52 from $54 (based on 12x her revised FY25 EPS). Cross reiterated her Western Digital target price of $41 (based on 9x her FY25 EPS).

Given ongoing weakness in the storage market, especially in the cloud, the analyst reduced her 4Q23 revenue and EPS estimates for Seagate to $1.61 billion and $(0.32) from $1.71 billion and $(0.24) (versus the Street at $1.69 billion and $(0.27)) and for Western Digital to $2.51 billion and $(1.99) from $2.57 billion and $(2.00) (versus the Street at $2.53 billion and $(2.02)).

For Seagate, the analyst reduced her Mass Capacity estimate given the continued weakness in cloud demand as customers digest excess inventory, remain cautious given macro concerns, and believe they are shifting some spending to NAND-based storage alternatives (especially given initial AI training investments). 

During the quarter, Seagate CFO Gianluca Romano signaled that revenue should come in at the lower end of the guidance range ($1.55 billion to $1.85 billion). Still, the company expects AI to drive long-term storage demand growth. 

Similarly, Western Digital expects cloud inventory digestion to last a few more quarters. 

Pure Storage, Inc PSTG management predicts C2028 will sell no new HDDs due to the growing delta in capacities between NAND and HDDs, which she thinks is aggressive, but a trend that could dampen HDD growth. 

The NAND market remains significantly oversupplied, leading her to estimate Western Digital Flash revenue down 50% Y/Y in 4Q23. TrendForce estimates NAND pricing was down 10% to 15% Q/Q in C2Q23, consistent with Micron Technology, Inc's MU ASP decline in the mid-teens % range in its 3Q23 (May). 

Lower pricing leads to strategic buys from PC OEMs (e.g., Dell, HP Inc., Apple), which could present a downside risk to FY24 revenue. 

TrendForce forecasts a further 3% - 8% Q/Q decline in NAND pricing in C3Q23, with potential for sequential growth in C4Q23. During the quarter, Seagate pointed to modest improvements in China demand, albeit still far from normalized, while Western Digital also noted "better activity" in the region and expected a stronger C2H23. 

However, Cross views geopolitical tensions between the U.S. and China as a critical risk factor for both companies. In particular, China banned Micron's products in May, impacting a "low-double-digit %" of Micron's worldwide revenue. 

China accounts for ~30% and ~25% of Seagate and Western Digital's overall normalized revenue, respectively. 

While the demand picture remains very low for both companies, we estimate a more pronounced rebound to begin in 2Q24 (Dec). 

Cross believes long-term storage trends remain intact, including exponential data creation (especially with AI initiatives, increased prevalence of edge computing, and growing adoption of 5G and the cloud. 

Price Actions: STX shares traded lower by 1.40% at $58.45 on the last check Tuesday. WDC shares traded lower by 0.51% at $38.72.