Seagate Technology Stock: A Buy The Dip Opportunity (NASDAQ:STX)

Seagate Technology Holdings (NASDAQ:STX) is poised to perform well as the global enterprise solid state drives [SSDs] market is expected to grow at a strong pace of about 10.4% annually to 2030. This growth should provide a strong tailwind for Seagate’s enterprise storage solutions.

Seagate has an attractive valuation with strong expected revenue and earnings growth, which is likely to drive the stock to outperform over the next few years. The recent sell-off in the stock could present a good buying opportunity.

Seagate’s Business Background

Seagate operates as a global provider of data storage solutions consisting of enterprise SSDs, hard disk drives, and network attached storage drives. STX also provides mission-critical SSDs and HDDs (hard disk drives), external storage solutions, and drives for PCs and laptops. Seagate’s products are primarily designed for mass capacity storage for use in hyperscale data centers.

The company sells its products to retailers, OEMs, and distributors. About 75% of Seagate’s revenue is derived from OEMs. Revenue from distributors comprises about 15%, while retailers comprise the remaining 10%.

Seagate’s Growth Catalysts

Seagate is positioned well to capitalize on the growth of the global enterprise market. The company is experiencing strong demand from the global cloud market. Seagate stated that this market helped drive its 18% revenue increase for Q4 2024. STX believes that continued growth of content creation will drive an increased demand for its storage solutions going forward.

STX also increased its gross margin [GM] to 31.8% in Q4 2024 over the 22.7% GM from Q4 2023 and the 26% GM from Q3 2024. Seagate’s operating margin also increased to 16.5% in Q4 2024, over 5% from Q4 2023, and 9% from Q3 2024. This led to a significant increase in the net income margin to 27% in Q4 2024 over a negative 6% net income margin from Q4 2023. Seagate attributes its margin improvement to support from a high HDD gross margin and from its expense discipline.

Seagate’s three priorities that they announced at the start of the fiscal year are driving current growth and can help drive future growth. One priority is to increase profitability. The company is already demonstrating improved profitability through its significant margin expansion. The increased margins led EPS to increase to $1.05 for Q4 2024, which beat estimates by $0.30 or 23%. This was a significant increase over the net EPS loss of $0.18 from Q4 2023. The increased profitability demonstrates Seagate’s effectiveness in keeping expenses down. Total operating expenses as a percentage of revenue were about 15% in Q4 2024, which was down from 17% in Q3 2024 and 18% from Q4 2023. Continued expense discipline can help drive higher profitability going forward.

The second priority is to drive cash generation. Seagate did increase operating cash flow by an impressive 99% to $434 million in Q4 2024 over Q4 2023. Increasing cash generation is driven by increasing margins and expense control. It is also driven by Seagate’s ability to capitalize on growing demand from the nearline cloud market. STX experienced a doubling of nearline cloud revenue in Q4 2024.

The company expects that growth to continue in fiscal 2025. Much of this growth is to support AI-related technology. For example, the large language models for generative AI applications will require increased HDD storage solutions, which Seagate provides. STX’s HDD solutions provide cost-effective scalable storage solutions, which fits right into the need to expand hardware stacks for generative AI.

Seagate’s third priority is to strengthen the balance sheet. STX did increase its total cash position by 78% to $1.4 billion in Q4 2024 as compared to $786 million at the end of Q4 2023. At the same time, total debt decreased from $5.8 billion a year ago down to the current level of $5.7 billion. STX has room for improvement, as total liabilities have been higher than total assets. STX has 1.2x more total liabilities than total assets, giving them negative total equity. The last time Seagate had positive equity was in 2022. So, I would expect STX to improve this aspect of the balance sheet, perhaps by being more aggressive with paying down debt.

Seagate’s Product Strategy

Seagate responded to the demand that it is experiencing by launching two new high capacity drives. This helps to support STX’s customer’s growing demand while profitably expanding shipment volume with the company’s existing HDD production capacity. STX has been ramping up volume for these drives. The benefits of these drives are: capacities of up to 28 terabytes along with solid yield, quality, and performance. The company is ramping up volume for these products for the cloud, enterprise, and VIA markets.

Seagate is also planning a ramp up of the Mosaic 4+, the company’s next generation HAMR (heat-assisted magnetic recording) drives. The Mosaic 4+ enables mass capacity storage gains by increasing the density of data bits on each square inch of disk space. The Mosaic 4+ provides 33% more capacity than the current version that Seagate has on the market today. This gives customers cost benefits (less power consumption) and saves space for data center operators as they expand AI and cloud infrastructure. Seagate expects to have a broad volume ramp up of Mosaic 4+ in mid-2025.

Seagate’s Attractive Valuation

Seagate is trading at about 14x analysts’ expected consensus EPS of $6.65 for FY25. STX’s fiscal year ends in June each year. This is lower than the Computer Hardware industry’s forward PE of 14.9x.

The more important valuation metric in my opinion for Seagate is the PEG ratio. The reason for that is because the PEG ratio factors in Seagate’s expected 3 to 5 year expected annual earnings growth of about 54%. With that said, Seagate is trading with a low PEG of just 0.26. This is significantly lower than the Computer Hardware industry’s PEG of 1.69.

That average expected earnings growth does seem high. However, I would point out that it is skewed high due to STX’s ongoing recovery from its net loss of $2.56 per share from 2023. That is skewing the expected EPS growth for fiscal 2025 as STX increases profitability at a strong pace. As a result, the expectation of 54% annual EPS growth over the next 3 to 5 years looks reasonable to me.

Seagate’s low valuation leaves plenty of room for the stock to increase as the company continues its strong growth.

Seagate’s Technical Perspective

Seagate’s daily chart above shows the stock pulling back from its 52-week high of $113.57. Before the sell-off, the stock was showing a bearish divergence as the price was increasing while the RSI and MACD indicators were declining from May 2024 through most of July 2024. This set-up led to the current pullback that the stock is experiencing right now.

The RSI (purple line in the middle of the chart) dropped down into the 30s, which is close to an oversold condition (below 30). This looks like a healthy technical pullback, which was due for tech stocks and the broader market.

Investors can consider dollar-cost averaging into the stock so that they don’t have to try to perfectly time the market. For those who would like to time the market, they could wait for the blue MACD line (bottom of the chart) to cross above the red signal line and for the histogram to turn from red to green. This would indicate a likely trend reversal from a downtrend back to an uptrend.

The Risks for Stock

One of the main risks for Seagate is competition. Seagate competes with large companies that have a lot of resources. These competitors include: Micron Technology (MU), Samsung (OTCPK:SSNLF), Western Digital (WDC), SK hynix (OTCPK:HXSCF), and others. One or more of Seagate’s competitors could produce more attractive storage solutions and could take market share away from the company. These companies compete on price, storage capacity, product performance, product quality/reliability, power consumption, data transfer rates, and more. Therefore, STX will have to remain on the cutting edge of technology development to remain competitive for these factors.

The capital intensive nature of Seagate’s business requires the company to make large investments in materials and facilities to manufacture its products. As a result, the company tends to run with a high amount of net debt (total debt minus total cash & equivalents). As of the end of Q4 2024, STX had $4.3 billion in net debt. The high amount of debt could be an issue if STX’s financials decline to the point where the company’s cash flow turned negative for a prolonged period of time. The good news is that Seagate consistently produces positive cash flow. STX had $918 million in operating cash flow for fiscal 2024.

Seagate’s Bottom Line Outlook

Seagate appears to have the right strategies in place to capitalize on the expected growth for its storage solutions. The cloud and AI markets should provide a solid long-term tailwind for the company.

STX’s above-average earnings growth has the likely potential to drive the stock to outperform the broader market over the next five years. Seagate’s low valuation leaves room for the stock to run higher. Investors may just need to wait out the current market correction, which should create a good buy-the-dip opportunity.