Seagate Technology (NASDAQ:STX) Reports Q3 In Line With Expectations But Quarterly Guidance Underwhelms

Radek Strnad /
2022/04/27 8:15 am EDT
Add to Watchlist

Data storage manufacturer Seagate (NASDAQ:STX) fell short of analyst expectations in Q3 FY2022 quarter, with revenue up 2.59% year on year to $2.8 billion. Guidance for the next quarter also missed analyst expectations with revenues guided to $2.8 billion at the midpoint, or 3.87% below analyst estimates. Seagate Technology made a GAAP profit of $346 million, improving on its profit of $329 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) Q3 FY2022 Highlights:

  • Revenue: $2.8 billion vs analyst estimates of $2.81 billion (small miss)
  • EPS (non-GAAP): $1.81 vs analyst expectations of $1.88 (3.78% miss)
  • Revenue guidance for Q4 2022 is $2.8 billion at the midpoint, below analyst estimates of $2.91 billion
  • Free cash flow of $363 million, down 14.7% from previous quarter
  • Inventory Days Outstanding: 67, up from 54 previous quarter
  • Gross Margin (GAAP): 28.7%, up from 27% same quarter last year

“Seagate's March quarter financial results were consistent with our revised outlook, with record nearline product revenue driven by cloud customers partially offsetting multiple macro related headwinds that impacted other end markets, particularly video and image applications, and pressured profitability,” 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 4.66% annually. But as you can see below, last year has been stronger for the company, growing from quarterly revenue of $2.73 billion to $2.8 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

It was tough quarter for Seagate Technology, with weak revenue growth of just 2.59%, which missed analyst estimates by 0.32%. This marks 5 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's revenue growth is expected to go negative next quarter, with the company guiding to decline of 7.06% YoY next quarter, but analyst consensus sees growth of 1.57% 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 150% since the IPO last 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 67, 14 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from Seagate Technology's Q3 Results

Sporting a market capitalization of $17.3 billion, more than $1.13 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 enjoyed seeing Seagate Technology’s improve their gross margin materially this quarter. And we were also glad to see the improvement in operating margin. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and it earnings were below analysts' expectations. Overall, it seems to us that this was a complicated quarter for Seagate Technology. The company is down 1.56% on the results and currently trades at $78 per share.

Seagate Technology may have had a tough quarter, but does that actually create an opportunity to invest 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.