Seagate Technology: Improved Fundamentals & Recovering Technicals

Seagate Technology NASDAQ: STX has been a historical leader in the data storage industry, traditionally selling the most popular brands of hard disk drives and the now popular solid-state drives. In recent times the business has shifted its business model toward offering cloud-based storage, and this segment is rapidly becoming more important for the company. The success of the company’s cloud product line is what has kept the company’s revenues above board while some of its other revenue drivers faltered due to macro headwinds. Regardless, Seagate still delivered a strong performance in Q3 and expects good results for the rest of the year.

Seagate’s Q3’22 Results

Seagate performed well in Q3 this year, with results in line with the upper range of its revised guidance. Like most companies that depend on shipping products through the congested supply chain, disruptions were set to affect Seagate’s orders and operations. The guidance also reflected the reemergence of COVID-19 in parts of the world such as China. Despite these factors, Seagate reported a record nearline revenue from customers in its cloud business. These sales helped offset the contraction in its video and image processing sales that pressured its profitability.

The results were positive for Seagate across the board. The company finished with revenue of $2.8B, which was up from $2.7B in the same quarter last year. Its GAAP gross margin also grew from 27.1% to 28.8% while its GAAP operating margin grew from 27.1% to 28.8%. GAAP diluted earnings per share also grew significantly by 11% from $1.39 to $1.56. Some other positives for the stock were that the company generated $363M in free cash flow and that it retains a healthy amount of cash and short-term investments on its balance sheet at $1.16B.

Seagate also gave guidance for the rest of FY 2022. Executives stated that the following guidance reflects changes in its strategy to account for the external challenges it currently faces from the supply chain and the ongoing disruptions due to COVID-19. The business expects to continue to receive support from its cloud product line and 20-plus TB hard drives to help sustain its top-line growth. Seagate expects revenues of $2.8B and a Non-GAAP diluted EPS of $1.90. 

Seagate’s Share Repurchases & Dividend Payments

In addition to Seagate’s strong financial performance in Q3, the company also benefited investors through delivering on its share repurchase program and by announcing a dividend payment. Seagate purchased 4.2M of ordinary shares for $417M. Significant announcements were made in April 2015 and November 2018 to repurchase $2.5B and $2.3B worth of shares respectively. A dividend of $0.70 per share will be paid in July, which continues Seagate’s trend of transferring value to investors through dividend payments.

Seagate Technical Analysis

Seagate is currently struggling to retain the value of its stock. It’s currently down 27.06% YTD despite being up 94.81% over the last five years. Seagate’s stock is also down significantly compared to the drop felt in the S&P 500, with it only being down 14.08%. Additionally, the stock is underperforming the MarketBeat consensus price target by 19%.  Despite the sell-off, there has been a consolidation in the stock's share price. It also benefited from the S&P 500 finding historical support near the 4070 level.

The stock is coiling tightly around its mean price of $82.50 with a low amount of volatility. The tight squeeze of the bands could foreshadow a possible widening and thus a significant price movement for the stock. If the broader market continues its temporary improvement this may give bulls enough confidence to break above the historical resistance of $90.