Seagate Technology (NASDAQ:STX) Exceeds Q2 Expectations, Stock Soars

Adam Hejl /
2023/01/25 4:34 pm EST
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Data storage manufacturer Seagate (NASDAQ:STX) reported Q2 FY2023 results topping analyst expectations, with revenue down 39.4% year on year to $1.88 billion. On top of that, guidance for next quarter's revenue was surprisingly good, being $2 billion at the midpoint, 6.22% above what analysts were expecting. Seagate Technology made a GAAP loss of $33 million, down on its profit of $501 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 FY2023 Highlights:

  • Revenue: $1.88 billion vs analyst estimates of $1.82 billion (3.21% beat)
  • EPS (non-GAAP): $0.16 vs analyst estimates of $0.09 ($0.07 beat)
  • Revenue guidance for Q3 2023 is $2 billion at the midpoint, above analyst estimates of $1.88 billion
  • Free cash flow of $172 million, up 53.5% from previous quarter
  • Inventory Days Outstanding: 66, down from 94 previous quarter
  • Gross Margin (GAAP): 13%, down from 30.4% same quarter last year

“Seagate is effectively managing through a tough macroeconomic environment. In the December quarter, we delivered revenue and non-GAAP EPS slightly above our guidance midpoint and extended a decade long trend of generating positive free cash flow,” 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.

The rapid growth in data generation and the need to support increases in processing power for everything from consumer devices to data center servers are driving the demand for memory chips. From the content delivery networks and edge computing to the cloud, data storage is a key component underpinning the global technology architecture. On top of that, secular growth drivers like machine learning and the boom in media-rich digital content are further accelerating the need for storage. Like all semiconductor segments, memory makers are highly cyclical, driven by supply and demand imbalances and exposure to consumer product cycles.

Sales Growth

Seagate Technology's revenue growth over the last three years has been unimpressive, averaging 0% annually. Last year the quarterly revenue declined from $3.11 billion to $1.88 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

Despite Seagate Technology revenues beating analyst estimates, this was still a slow quarter with a 39.4% revenue decline.

Seagate Technology's revenue growth has decelerated for the last three quarters and the company expects growth to turn negative next quarter guiding to a 28.6% year on year decline, while analysts are estimating a NTM revenue decline of 5.52%.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. 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 66, 8 days above the five year average, suggesting that despite the recent decrease the inventory levels are still higher than what we used to see in the past.

Key Takeaways from Seagate Technology's Q2 Results

With a market capitalization of $12.8 billion, more than $770 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were very impressed by the strong improvements in Seagate Technology’s inventory levels. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was less good to see that the revenue growth was quite weak and operating margin deteriorated. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company is up 6.16% on the results and currently trades at $66.16 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.

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