Exponential Data From Gen AI Will Increase Demand For Mass Storage Solutions

Key Takeaways

• Strong demand for nearline products and advancements in HAMR technology position Seagate for revenue and market competitiveness growth.
  
• Strategic planning in production and focus on high-capacity drives aim at enhancing profitability and expanding gross margins.
  
• Supply constraints and high debt levels, coupled with market demand shifts, pose risks to Seagate's revenue growth and financial performance.

Catalysts

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

• The surge in nearline product demand, driven by significant investments in cloud infrastructure and Expected continued growth in cloud capital expenditures for 2025, is poised to bolster Seagate's revenue and profitability.
  
• Advancements and milestones in Seagate's HAMR-based Mosaic platform, such as the launch of 36 TB drives, are well-positioned to enhance the company's market competitiveness and support long-term revenue growth.
  
• The expected exponential increase in data generated by Gen AI applications, with projections of storage growth from data-rich imagery and video content, signals potential for sustained revenue expansion in mass capacity storage solutions.
  
• Seagate's disciplined production capacity planning and technology transitions to support exabyte growth, without adding new head and media capacity, indicate a strategic approach to profitability and margin expansion.
  
• The focus on high-capacity drives and ongoing successful customer qualifications for advanced products like Mosaic HAMR drive substantial potential for improved gross margins, driven by a favorable product mix shift.

Seagate Technology Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Seagate Technology Holdings's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.7% today to 13.7% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $6.28) by about January 2028, up from $1.2 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.0x on those 2028 earnings, up from 18.0x today. This future PE is greater than the current PE for the US Tech industry at 22.4x.
• Analysts expect the number of shares outstanding to grow by 1.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.91%, as per the Simply Wall St company report.

Seagate Technology Holdings Future Earnings Per Share Growth

Risks

• The production issue leading to supply constraints for the March quarter may impact Seagate's revenue and ability to capitalize on demand, potentially affecting overall financial performance.
  
• The dependency on high-capacity nearline drives for growth could be risky if there are delays in customer qualifications or adoption, which could impact revenue growth expectations.
  
• The saturation of the AI and cloud market or shifts in demand dynamics, such as slower-than-expected growth in cloud capital investments or AI-related storage needs, could impact Seagate's revenue capabilities.
  
• Seagate's debt load of $5.7 billion, despite efforts to reduce debt, could constrain financial flexibility, potentially affecting net margins if interest expenses remain significant.
  
• Supply-demand mismatches in the future could disrupt operations, especially if Seagate's focus on maintaining production discipline does not align with sudden shifts in market demand, impacting profitability.

Valuation

• The analysts have a consensus price target of $119.99 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 $160.0, and the most bearish reporting a price target of just $68.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.2 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 7.9%.
• Given the current share price of $100.27, the analyst's price target of $119.99 is 16.4% higher.
• 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.