Is Seagate Still a Good Investment?

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Seagate Technology (NASDAQ: STX) is a leader in the hard-disk drive (HDD) market alongside Western Digital (NASDAQ: WDC). Seagate had done well after floods in Thailand disrupted supply and resulted in inflated prices of memory drives. But lately the company hasn't been doing as well, as its recent 4Q 2013 results were a mixed bag.

Facing weakness

Seagate reported revenue of $3.4 billion, which was down 23.6% from the year-ago quarter's $4.5 billion. The normalization of supply in the hard-drive market has resulted in normalized prices as opposed to inflated prices previously, thereby leading to lower revenue. Also, the company continues to face stiff competition from its peers. In addition, the HDD segment is facing pressure due to weak consumer demand across the globe amid declining PC and notebook sales. All of these dynamics are paralyzing Seagate’s ability to grow.

What next?

Despite the ongoing cost-reduction measures the company is undertaking, the declining prices of HDD are weighing it down.

In order to expand its presence in newer markets, Seagate is developing newer products. The company has significant exposure to high-end corporate desktop and server markets, especially compared to its main rival Western Digital. Also, data-center growth across the globe will result in the need for more storage drives and hopefully help Seagate perform better.

Seagate is already invested in the solid-state drive (SSD) sector and is also producing hybrid drives. Also, demand for HDDs is here to stay as cloud computing grows and the need to store more data arises. Seagate's presence in SSHD – solid-state hybrid drives -- which give the best of both worlds (the speed of SSD at the cost of HDD), is another advantage worth considering.

When it comes to hard drives, there will always be potential for capacity growth, as mentioned above, so it’s not all as gloomy as one tends to see it. Earlier this year, Seagate unveiled a $180-million research center for inventing next-generation disk drives. Moves such as these should help it stay ahead of rivals.

Seagate is one of the only three disk-drive players in world, along with Western Digital and Toshiba. It is investing for the future and expects growth driven by global demand for larger chunks of data as the world embraces cloud computing.

Looking at the others

Western Digital declared its 4Q 2013 results recently and posted EPS of $1.96, comprehensively beating the consensus estimate of $1.79. Its revenue declined 21.6% year-over-year to $3.7 billion, a figure well over its own guidance range. Reasons behind the decline in revenue were mainly the falling prices and a seasonal change in the product mix.

A few weeks back, Western Digital and sTec announced that they have entered into a merger agreement under which sTec will be acquired by HGST, a wholly-owned subsidiary of Western Digital. This positions Western Digital favorably as far as the expanding SSD market is concerned.

Earlier this year, Western Digital acquired the facilities, infrastructure and IP of Hoya Magnetics Singapore. This was done with a view to strengthen the company's ability to meet the growing demand of 2.5-inch hard drives in particular besides expanding the client base. So even Western Digital is moving smartly to better compete with Seagate.

SanDisk (NASDAQ: SNDK) is a leader in the solid-state-storage business. It has been growing in leaps and bounds, riding the growth of mobile computing, besides offering a whole gamut of solid-state-storage solutions, like pen drives, enterprise SSD, SAS SSD for desktop and data-center applications, etc.

The company has planned for capacity growth in the second half of 2013 as it looks to further widen its client base and enterprise portfolio. SanDisk's product innovation, such as Extreme II SSD, has received good reviews and is expected to provide strong competition to the established companies like Western Digital and Seagate. 

SanDisk and Western Digital are both coming up with innovative products in order to broaden their client base, and new acquisitions such as Velobit continue to make Western Digital's position more robust.

Conclusion

Seagate can still do well depending on how its product development plays out. But the company is facing competition from strong players such as its old foe Western Digital and SSD high-flyer SanDisk. The stock has sold off from its 52-week high and pays a good dividend that yields 3.7%, which is higher than Western Digital.

Its PE ratio of 8.5 is also below Western Digital's, and all of these factors point to the fact that Seagate is good value at these levels. But investors should be cautious and keep a vigilant eye on the developments in the storage industry if they are going long on Seagate.

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ANUP SINGH has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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