No Surprises In Seagate Technology's (NASDAQ:STX) Q2 Sales Numbers But Stock Drops On Weak Guidance

Kayode Omotosho /
2022/01/26 4:17 pm EST
Add to Watchlist

Data storage manufacturer Seagate (NASDAQ:STX) reported results in line with analyst expectations in Q2 FY2022 quarter, with revenue up 18.7% year on year to $3.11 billion. However, management provided guidance for the next quarter with revenues at $2.9 billion at the midpoint, or 0.16% below analyst estimates. Seagate Technology made a GAAP profit of $501 million, improving on its profit of $280 million, in the same quarter last year.

Is now the time to buy Seagate Technology? Access our full analysis of the earnings results here, it's free.

Seagate Technology (STX) Q2 FY2022 Highlights:

  • Revenue: $3.11 billion vs analyst estimates of $3.11 billion (small beat)
  • EPS (non-GAAP): $2.41 vs analyst estimates of $2.36 (2.29% beat)
  • Revenue guidance for Q3 2022 is $2.9 billion at the midpoint, roughly in line with what analysts were expecting
  • Free cash flow of $426 million, up 12.4% from previous quarter
  • Inventory Days Outstanding: 54, up from 50 previous quarter
  • Gross Margin (GAAP): 30.4%, up from 26.5% same quarter last year

“Calendar 2021 was an outstanding year for Seagate. Compared with the prior calendar year, we grew revenue by 18% and more importantly, delivered free cash flow growth of 39%, which we are deploying effectively into our long-standing capital returns program,” said Dave Mosley, Seagate’s chief executive officer.

The developer of the original 5.25inch hard disk drive, Seagate (NASDAQ:STX) is a leading producer of data storage solutions, including hard drives and Solid State Drives (SSDs) used in PCs and data centers.

Sales Growth

Seagate Technology's revenue growth over the last three years has been slow, averaging 2.99% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $2.62 billion to $3.11 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Seagate Technology Total Revenue

This was an OK quarter for Seagate Technology with revenues growing 18.7%, ahead of analyst estimates by 0.02%. This marks 4 straight quarters of revenue growth, implying we are mid-cycle for Seagate Technology, as a typical upcycle tends to last 8-10 quarters.

Seagate Technology believes the growth is set to continue, and is guiding for revenue to grow 10.5% YoY next quarter, and Wall St analysts are estimating growth 0.28% over the next twelve months.

There are others doing even better than Seagate Technology. Founded by ex-Google engineers, a small company making software for banks has been growing revenue 90% year on year and is already up more than 400% since the IPO in December. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Seagate Technology Inventory Days Outstanding

This quarter, Seagate Technology’s inventory days came in at 54, one day above the five year average, showing that despite the recent increase there is no indication of an excessive inventory buildup at the moment.

Key Takeaways from Seagate Technology's Q2 Results

Sporting a market capitalization of $21.1 billion, more than $1.53 billion in cash and with positive free cash flow over the last twelve months, we're confident that Seagate Technology has the resources it needs to pursue a high growth business strategy.

We were very impressed by the strong improvements in Seagate Technology’s gross margin this quarter. And we were also glad to see the improvement in operating margin. On the other hand, it was less good to see the inventory levels increase and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results still seemed mixed. Investors might have been expecting more and the company is down 6.55% on the results and currently trades at $90 per share.

Should you invest in Seagate Technology right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 70% year on year and best-in-class SaaS metrics it should definitely be on your radar.

The author has no position in any of the stocks mentioned.