Seagate Technology (NASDAQ:STX) Misses Q4 Sales Targets

Full Report / July 21, 2022
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Data storage manufacturer Seagate (NASDAQ:STX) fell short of analyst expectations in Q4 FY2022 quarter, with revenue down 12.7% year on year to $2.62 billion. Guidance for the next quarter also missed analyst expectations with revenues guided to $2.5 billion at the midpoint, or 16.5% below analyst estimates. Seagate Technology made a GAAP profit of $276 million, down on its profit of $482 million, in the same quarter last year.

Seagate Technology (STX) Q4 FY2022 Highlights:

  • Revenue: $2.62 billion vs analyst estimates of $2.78 billion (5.72% miss)
  • EPS (non-GAAP): $1.59 vs analyst expectations of $1.89 (15.7% miss)
  • Revenue guidance for Q1 2023 is $2.5 billion at the midpoint, below analyst estimates of $2.99 billion
  • Free cash flow of $108 million, down 70.2% from previous quarter
  • Inventory Days Outstanding: 76, up from 67 previous quarter
  • Gross Margin (GAAP): 28.8%, down from 29.3% same quarter last year

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.

Seagate's peers and competitors include Western Digital (NASDAQ:WDC), SK Hynix (KOSI:000660), and Samsung (KOSI:005930).

Memory Semiconductors

The global memory chip market has become concentrated due to the highly commoditized nature of these semiconductors. Despite the market consolidation, DRAM and NAND are subject to wide pricing swings as supply and demand ebbs and flows. This plays itself out in the business models of memory producers, where the large, fixed cost bases required to produce memory chips in volume can become very profitable during times of rising prices due to high demand and tight supply but also can result in periods of low profitability when more supply is brought online or demand drops. Read More There are two main types of memory chips: dynamic random access memory (DRAM) and Flash memory (NAND). In any electronic device where a processor or a graphics chip is conducting a task using data, it needs to read the data from where it is stored, known as memory. Smartphones, PCs, and data centers account for more than two thirds of memory demand. DRAM is “volatile” memory, it is a semiconductor that requires an electric charge to retain data – it is the type of memory commonly used in PCs. The advantages of DRAM are the speed at which a CPU/GPU can access the data and its long useful life. Unfortunately, “volatile” means it only can hold data temporarily when it is powered. By comparison, flash memory or NAND is “non-volatile” memory, which means that it saves data when power is removed, making it commonly used in almost every mobile device, along with USB flash drives. Its smaller form factor and greater storage capacity has made NAND-powered solid state drives (SSDs) the long term replacement for the original computing storage device, the hard disk drive.

Sales Growth

Seagate Technology's revenue growth over the last three years has been unimpressive, averaging 4.96% annually. Last year the quarterly revenue declined from $3.01 billion to $2.62 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 a difficult quarter for Seagate Technology, with revenue declining by 12.8% year on year, missing analyst estimates by 5.73%. Seagate Technology's growth turned to declines this quarter, signal that the current downcycle is deepening.

Revenue growth went from positive to negative this quarter, and is expected to stay negative next quarter with an estimated decline of 19.8% YoY while analysts expect revenues to turn positive over the next twelve months with growth of 4.35% over the next twelve months.

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 76, 21 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Pricing Power

Seagate Technology's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 28.8% in Q4, down 0.5 percentage points year on year.

Seagate Technology Gross Margin (GAAP)

Seagate Technology' gross margins have been trending up over the past year, averaging 29.6%. This is a welcome development, as Seagate Technology's margins are below the group average, potentially pointing to improved demand and pricing.


Seagate Technology reported an operating margin of 16% in Q4, down 2.1 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.

Seagate Technology Adjusted Operating Margin

Operating margins have been trending up over the last year, averaging 18.2%. Seagate Technology's margins are around the midpoint for the semiconductor industry, as its cost structure is appropriately managed.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 13.3% over the next twelve months, although estimates are likely to change post earnings.

Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Seagate Technology's free cash flow came in at $108 million in Q4, down 69.4% year on year.

Seagate Technology Free Cash Flow

Seagate Technology produced free cash flow of $1.27 billion in the last year, which is 10.9% of revenue. It's good to see positive free cash flow, and that puts the company in a position to reinvest, but we wouldn't mind seeing cashflow yield improve a little.

Seagate Technology’s average return on invested capital (ROIC) over the last 5 years of 37.9% implies it has a strong competitive position and is able to invest in profitable growth over the long term.

Key Takeaways from Seagate Technology's Q4 Results

Sporting a market capitalization of $17.6 billion, more than $615 million 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 struggled to find many strong positives in these results. On the other hand, it was less good to see that the revenue growth was quite weak and the revenue guidance for the next quarter missed analysts' expectations. Overall, it seems to us that this was a complicated quarter for Seagate Technology. The company is flat on the results and currently trades at $83.61 per share.

Is Now The Time?

When considering Seagate Technology, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in the case of Seagate Technology we will be cheering from the sidelines. Its revenue growth has been very weak, and analysts expect growth rates to deteriorate from there. And while its high return on invested capital suggests it is well run and in a strong position for profit growth, unfortunately gross margin indicate some combination of pricing pressures or rising production costs.

Seagate Technology's price to earnings ratio based on the next twelve months is 9.3x. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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