Mozaic Drives And Cloud Demand Will Transform Data Storage

Key Takeaways

• Seagate's technological advancements and growing demand for mass capacity storage are projected to boost revenue and expand operating margins.
  
• Strategic actions like pricing and manufacturing shifts enhance profitability, while agreements with key customers ensure revenue visibility.
  
• Rising competition, tax changes, and debt levels pose significant threats to Seagate’s market position, impacting revenue, margins, and profitability.

Catalysts

Engages in the provision of data storage technology and infrastructure solutions in Singapore, the United States, the Netherlands, and internationally.

• Seagate is ramping up its HAMR-based Mozaic drives, which represent a technological breakthrough. The transition to these drives is expected to lead to sustained and profitable growth, impacting both revenue and net margins positively.
  
• The growing demand for mass capacity storage driven by the cloud CapEx investment cycle and data center build-outs for AI transformation is likely to elevate Seagate's revenue streams. This increased demand aligns with ongoing cloud infrastructure expansion, suggesting positive impacts on earnings.
  
• Seagate's strategic pricing actions and its build-to-order strategy enhance its financial predictability and profitability, reflecting in expanding operating margins and improved earnings visibility.
  
• Ongoing agreements with large cloud and hyperscale customers indicate strong nearline exabyte demand, providing revenue visibility into calendar year 2026. The expected sequential revenue growth supports earnings growth projections.
  
• The company's operational agility and strategic adjustments, like potential geographic manufacturing shifts, are expected to mitigate risks associated with trade policies. This focus on managing controllable factors is likely to sustain or even increase operating margins and free cash flow.

Seagate Technology Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Seagate Technology Holdings's revenue will grow by 9.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.1% today to 21.1% in 3 years time.
• Analysts expect earnings to reach $2.5 billion (and earnings per share of $11.7) by about September 2028, up from $1.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, down from 25.5x today. This future PE is lower than the current PE for the US Tech industry at 21.8x.
• Analysts expect the number of shares outstanding to grow by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.1%, as per the Simply Wall St company report.

Seagate Technology Holdings Future Earnings Per Share Growth

Risks

• Trade policy uncertainties, such as tariff measures, could affect customer buying decisions and may impact future revenue if not managed properly.
  
• Temporary supply constraints and operational issues, as experienced in the March quarter, can limit revenue and impact profitability forecasts if they persist.
  
• Significant debt levels, despite recent reductions, could constrain financial flexibility and affect net margins if cash flow generation declines or interest rates rise.
  
• The expansion of competing technologies, like SSDs and QLC NAND, may enhance competitive pressure and impact Seagate's market share, potentially affecting revenue and margins.
  
• Future tax changes, including the adoption of Pillar 2 global minimum tax, could increase tax expenses and reduce net earnings starting in fiscal 2026.

Valuation

• The analysts have a consensus price target of $166.421 for Seagate Technology Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $200.0, and the most bearish reporting a price target of just $80.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $12.0 billion, earnings will come to $2.5 billion, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 8.1%.
• Given the current share price of $176.32, the analyst price target of $166.42 is 5.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.