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Morningstar | Seagate Ends Fiscal 2018 on High Note, and 2019 Poised to Be Another Growth Year; Raising FVE to $46

Seagate Technology reported fiscal fourth-quarter results consistent with our expectations and announced CFO Dave Morton will leave the firm. Seagate has benefited from solid demand for its mass storage offerings, with its quarterly average capacity per hard disk drive at 2.5 terabytes, up 40% year over year. The quarterly metrics were also boosted by a strong average selling price per unit of $72, up 12% year over year. We applaud the firm’s recent cost-cutting endeavors, as it recorded its fourth consecutive quarter of sequential operating margin expansion. Based on management’s early commentary for fiscal 2019, we foresee Seagate recording another year of modest top-line growth. Consequently, we are raising our fair value estimate to $46 per share from $42. However, we recommend prospective investors wait for a wider margin of safety in no-moat Seagate, as broader headwinds for HDDs are poised to persist.

Fourth-quarter revenue grew 17.8% year over year to $2.8 billion, led by the aforementioned ASP and average capacity increases. The firm’s ramp of its high-capacity drives is critical for its prospects, as it must outpace solid-state drive capacity increases to retain HDD share at major cloud vendors and large enterprises. Gross margins rose 170 basis points sequentially to 31.9% due to a better mix in Seagate’s enterprise portfolio, product cost benefits, and higher utilization of the firm’s vertically integrated factories. For fiscal 2018, revenue grew 3.8% to $11.2 billion, marking the first meaningful top-line growth year since 2012. Management expects revenue for the first quarter of fiscal 2019 to be up 5% sequentially, which implies year-over-year growth of over 10%.