Seagate Rating Upgraded by Morgan Stanley, Shares Up 5.4%

On Apr 10, shares of Seagate Technology Inc. STX rallied about 5.4% to $59.35 per share on the heels of a rating upgrade from Morgan Stanley.

Analyst Katy Huberty upgraded Seagate from “equal weight” to “overweight,” with a $72 price target. Huberty stated, "We believe accelerating IT budget and data storage growth in the Data Era are underappreciated by investors."

The upgrade follows an increased interest in artificial intelligence (AI) and machine learning. Exponential growth in stored data, Nearline’s rapid adoption, stable HDD pricing environment and low inventory levels are positives. We believe this could be a potential long-term growth driver for Seagate, making the stock a lucrative opportunity for investors who want to capitalize on this shift in the storage industry.

Strong Demand for HDD: Key Catalyst

HDD requirement is growing due to strong demand for high-capacity mass-storage solutions. Per management, in the second quarter of fiscal 2018, 10-terabyte helium nearline product was one of the major top-line drivers. 12-terabyte helium product is also gaining favor among users. High customer satisfaction is likely to boost the market adoption of these products.

Further, stabilization of the PC market per the latest report from Gartner and IDC bodes well for memory shipments, particularly HDDs. According to IDC, worldwide PC shipment has shown signs of growth in the fourth quarter of 2017, during which shipments grew 0.7% on a year-over-year basis to 70.6 million units.

Seagate also expects its exabyte shipments to be around 88 exabytes, which reflects drive shipments to be around 40 million and average capacity per drive to be approximately 2.2 terabytes. The company has experienced exabyte growth in all end markets that include PC compute, consumer, surveillance, gaming, and NAS markets.

Other Positives

Notably, the shares of this second largest manufacturer of HDDs have returned 22.8% year over year, substantially outperforming the industry’s rally of 19.4%.

Additionally, advancement of cloud storage technologies in the industry is a tailwind. This has led to an increase in the deployment of high capacity mass storage products, which bodes well for Seagate.

Moreover, the company’s long-term agreement with Toshiba for NAND chips supply will help it to expand product portfolio rapidly. Further, Seagate’s effort to improve areal density with the ramp up of heat assisted magnetic recording (“HAMR”) technology is expected to be shipped in 2019. This is likely to drive revenues in 2019.

These factors are expected to keep Seagate’s earnings per share (EPS) on a growth trajectory, which is currently projected at 15.6%. Notably, the company topped the Zacks Consensus Estimate for earnings in three of the trailing four quarters.

Currently, Seagate is a Zacks #3 (Hold) Ranked stock with a VGM score of A.

Stocks to Consider

Few better-ranked stocks in the broader technology sector are Western Digital Corporation WDC, Applied Materials, Inc. AMAT and Micron Technology, Inc. MU. All sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Western Digital, Applied Materials and Micron have a long-term expected EPS growth rate of 19%, 13.26% and 10%, respectively.

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