BRAZIL – 2020/01/13: In this photo illustration the Seagate Technology logo is seen displayed on a … [+]
Seagate stock (NASDAQ: STX) is up around 40% since the beginning of 2020, but at the current price of $71 per share, we believe that Seagate stock has around 15% potential downside.
Why is that? Our belief stems from the fact that Seagate stock is up around 75% from the low seen in March 2020. Further, after posting weak Q2 2021 numbers, it’s clear that Seagate did not benefit from the pandemic and that demand will take time to get to pre-Covid levels. Our dashboard What Factors Drove 84% Change In Seagate Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.
Stock Prices
Seagate stock’s rise since late 2018 came despite a 6% drop in revenues from $11.18 billion in FY 2018 to $10.51 billion in FY 2020. However, helped by a 9% decrease in the outstanding share count over this period, RPS (revenue-per-share) rose around 3%, from $38.83 in 2018 to $40.11 in 2020.
Seagate’s P/S (price-to-sales) ratio meanwhile rose from 1x in 2018 to 1.6x in 2019. It has further risen to 1.8x currently, riding the rally in the broader markets post the Covid crash. However, given Seagate’s weak Q1 2021 results, there is possible downside risk for the company’s P/S multiple.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus and the resulting lockdowns have led to a drop in demand for memory storage products such as flash memory and hard disk drives. With the increasing work-from-home trend, people are relying more and more on cloud storage and streaming services. Seagate, a data storage company, specializing in hardware storage, hasn’t benefited from this trend. This is evident from Seagate’s Q1 2021 results, where revenue dropped to $2.62 billion, from $2.7 billion for the same period in FY 2020. Operating expenses didn’t drop at the same rate, and combined with a roughly unchanged tax rate, this saw net income drop from $318 million to $280 million. Despite a 5% drop in the share count, EPS dropped from $1.21 to $1.12.
With the economy opening up and people becoming more active, we expect work-from-home to remain the new trend. This could lead to stagnant revenue growth in the near to medium term, and if the company is unable to control expenses, then this could mean even lower profitability over the remainder of FY 2021. We believe this could lead to the stock seeing its P/S multiple decline from the current level of 1.8x to around 1.6x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $60, a downside of 15% from the current price around $71.
While Seagate stock may not seem attractive, 2020 has created many more pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Apple vs Microsoft
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