Seagate (NASDAQ: STX) recently reported its Q1’24 results, which showed that the company’s revenues and earnings fell short of expectations. Despite a 35% rise in Seagate’s stock this year, we believe that it may be fully priced at $70. The stock has experienced inconsistent performance in the past, making it difficult to beat the S&P 500. Moreover, the uncertain macroeconomic environment and weak demand outlook for storage companies raise concerns about Seagate’s future performance. With a valuation that suggests a 10% downside from its current levels, investors may want to consider other stocks in the Information Technology sector.
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Overview
In this article, we will take a closer look at Seagate’s Q1’24 results and discuss how the company’s stock has been performing. We will also explore the macroeconomic environment and its impact on Seagate’s valuation. Additionally, we will analyze the sales outlook for the company and compare it to its peers in the industry.
Seagate’s Q1’24 Results
Revenue and earnings missing estimates
Seagate recently reported its Q1’24 results, and unfortunately, both its revenue and earnings fell short of the estimates made by financial analysts. The company reported revenue of $1.45 billion and an adjusted loss of $0.22 per share. This was lower than the consensus estimates of $1.53 billion in sales and a loss of $0.19 per share. While these results may be disappointing, it’s important to dive deeper and understand the bigger picture.
Stock Performance
STX stock gains of 15% in 2021
Inconsistent performance over the years
Comparison with S&P 500 performance
Looking at the performance of Seagate’s stock, we see that it has had a gain of 15% in 2021. However, when we examine its performance over the years, we notice a lack of consistency. In 2022, the stock saw a significant decline of 53%, while in 2023, it had a strong recovery and gained 35%. In comparison, the broader market index, the S&P 500, had returns of 27% in 2021, -19% in 2022, and 14% in 2023. This means that Seagate underperformed the S&P 500 in 2022. It’s worth noting that beating the market consistently has been challenging for individual stocks in recent years, even for major players in the tech industry. However, the Trefis High-Quality Portfolio, which is a collection of 30 stocks, has consistently outperformed the S&P 500. This suggests that investing in a diversified portfolio may be a more reliable strategy.
Trefis High Quality Portfolio
Outperformance compared to S&P 500
The Trefis High-Quality Portfolio has proven to be a successful investment option, consistently outperforming the S&P 500 over the years. This portfolio comprises a carefully selected group of 30 stocks that have provided better returns with less risk compared to the benchmark index. Investing in the Trefis High-Quality Portfolio offers a smoother ride for investors, as seen in its performance metrics.
Macroeconomic Environment
Uncertain environment with high oil prices and elevated interest rates
Seagate operates within a macroeconomic environment that is currently experiencing uncertainty due to factors such as high oil prices and elevated interest rates. These factors can have a significant impact on the company’s operations and financial performance. It’s crucial to consider the broader economic landscape when evaluating Seagate’s prospects.
Valuation Perspective
STX stock looks fully priced
Estimated valuation at $63 per share
Trading at 1.8x revenues compared to 5-year average of 1.2x
From a valuation perspective, the current price of Seagate’s stock, also known as STX, appears to be fully priced. Our estimation suggests that the fair valuation for STX is around $63 per share, indicating a potential downside of 10% from its current price of $71. Additionally, STX is trading at a price-to-sales (P/S) ratio of 1.8x, which is higher than its five-year average of 1.2x. This increase in the P/S ratio can be attributed to a significant decline in sales. It’s crucial to carefully evaluate these valuation metrics before making any investment decisions.
Sales Outlook
Significant decline in sales in fiscal 2023
Weak demand outlook for PCs and storage companies
Seagate experienced a substantial decline in sales during fiscal year 2023, with a 37% decrease due to lower volume and price erosion in the storage industry. The demand outlook for PCs and storage companies remains weak. It is projected that PC shipments will fall by 14% in 2023, and tablet shipments will decline by 20%. However, there is expected to be a low to mid-single-digit recovery in 2024. These forecasts do not paint a positive picture for the overall demand for storage companies, including Seagate.
Q1’24 Results Analysis
Revenue decline of 29% YoY
Significant fall in net profit and earnings per share
In Q1’24, Seagate reported a 29% year-over-year decline in revenue. This decline was primarily driven by lower sales in the face of weak macroeconomic conditions. Additionally, the company experienced a significant fall in net profit and earnings per share. The adjusted net loss for Q1’24 was $46 million, which is a stark contrast to the $101 million profit reported in the same quarter of the previous year. The adjusted loss per share also dropped from $0.48 to $0.22.
Demand Outlook
Possible improvement in PC demand but uncertain due to potential recession
While there are signs of potential improvement in PC demand, it’s important to consider the uncertain macroeconomic conditions that could impact this outlook. A possible recession could hamper the demand for Seagate’s products, both in the enterprise and consumer space. With consumer spending taking a hit and businesses becoming more cautious in their investments, the demand for storage solutions may be affected.
Comparison with Peers
Evaluate peer performance and metrics
To gain a comprehensive understanding of Seagate’s position in the industry, it is important to compare its performance and metrics with those of its peers. By evaluating how Seagate stacks up against its competitors, we can better assess its strengths, weaknesses, and overall standing in the market.
In conclusion, Seagate’s Q1’24 results indicate that the company has fallen short of revenue and earnings estimates. The stock has seen inconsistent performance over the years, and current macroeconomic conditions pose challenges for the company. From a valuation perspective, the stock appears to be fully priced, and the sales outlook for the company is weak due to declining demand in the PC and storage industries. Investors may want to consider alternative options in the Information Technology sector. It’s crucial to thoroughly research and understand the market landscape before making any investment decisions.
