Seagate Stock To Drop To Early-2020 Levels?

Up around 65% since March, we believe Seagate stock (NASDAQ: STX) could see significant downside. STX stock is 14% above the level it was at, at the start of 2020. It traded at $54 in February 2020 – just before the outbreak of coronavirus – and is currently around 25% above that level, as well. Further, due to poor Q2 2021 results, and unlikely demand growth in the near to medium term, the stock has the potential to drop almost 15% to its early 2020 levels of around $59. Our conclusion is based on our comparative analysis of Seagate stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 73% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how STX stock and the broader market fared during the 2007-08 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

STX and S&P 500 Performance Over 2007-08 Financial Crisis

We see STX stock declined from levels of around $27 in October 2007 (pre-crisis peak) to levels of around $4 in March 2009 (as the markets bottomed out), implying STX stock lost 83% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of $18 in early 2010, rising by more than 300% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

STX Fundamentals Over Recent Years

STX revenues decreased from $10.8 billion in 2017 to $10.5 billion in 2020 (Seagate’s fiscal year ends in June). LTM revenues currently stand at around $10.2 billion, as Seagate is still recovering from the demand hit it took due to the pandemic. Despite a decrease in revenues, EPS rose almost 50% from $2.61 in 2017 to $3.83 in 2020, as a result of a drop across all operating expense heads.

Does STX Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Seagate’s total debt dropped from $5 billion in 2017 to $4.2 billion in 2020, but has jumped to around $5.1 billion as of Q2 2021. Its total cash also dropped from around $2.5 billion to $1.8 billion over the same period. Further, the company generated around $1.5 billion cash from operations over the last 12 months. A steady cash cushion combined with a strong operating cash flow, provides the company the means to deal with the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

With the recent surge in the number of new Covid-19 cases in the U.S., and the rapid shift to cloud storage, we expect physical memory (Flash and hard disk drive) sales to struggle in the medium term. This is evident from Seagate’s Q2 2021 earnings, where revenue came in at $2.62 billion, down from $2.7 billion for the same period in FY 2020. The company saw cost of sales and operating expenses as a % of revenue rise marginally over this period, dropping operating margins to 13.3% from 14.2%. This saw EPS drop to $1.12 from $1.21. Going forward, if the company keeps seeing weaker revenues, this will eventually weigh down profitability even further. We believe that STX stock has almost 15% potential downside in the near term, and even as the lockdowns are gradually lifted, revenues will stay weak in the near to medium term.

While Seagate Technology stock may not be attractive, 2020 has created many pricing discontinuities which can offer undervalued trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Intel vs Cisco.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams