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Seagate Technology Holdings plc (NASDAQ:STX) is Positioned to Outperform the Market in the Growing Data Storage Industry

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This article was originally published on Simply Wall St News

Seagate Technology Holdings plc (NASDAQ:STX) share price has risen 160% in the last half decade. Most would be very happy with that, but for stocks it is always more important to have good information on the future.

As we wait for tomorrow's earnings call, we will take a look at what kind of future growth we can expect from the stock and the industry in which it operates.

On the 8th June 2021, Seagate raised the earnings guidance for the stock for an extra US$100m in revenue to US$2.95b, and the stock tumbled shortly after - from US$100.8 per share, down 15% to US$85.5 per share on 20 July, before the earnings call. This looks more like a market move driven by the current general state, because on 22 April 2021 when Seagate first issued guidance, the price actually jumped.

Considering that the guidance update has been issued recently, we can assume that there may be no big surprise on earnings day, but we will take a look at Seagate's growth prospects in order to evaluate what can we expect as a general trend.

View our latest analysis for Seagate Technology Holdings

One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During five years of share price growth, Seagate Technology Holdings achieved compound earnings per share (EPS) growth of 31% per year. This EPS growth is higher than the 21% average annual increase in the share price.

You can see below how EPS has changed over time on the image below.

earnings-per-share-growth
earnings-per-share-growth

Before buying or selling a stock, we always recommend a close examination of historic growth trends, available here.

This signals that the market is less enthusiastic about the future EPS, and the price is slowly starting to convert to value, rather than to future growth.

The graph above shows an expectation of an EPS return to prior levels by mid 2022, but no significant growth after that.

What About Dividends?

When looking at investment returns, it is important to consider the difference between total shareholder return (TSR) and share price return.

Whereas the share price return only reflects the change in the share price, the TSR includes the value of dividends (assuming they were reinvested) and the benefit of any discounted capital raising or spin-off.

It's fair to say that the TSR gives a more complete picture for stocks that pay a dividend. In the case of Seagate Technology Holdings, it has a TSR of 239% for the last 5 years. That exceeds its share price return that we previously mentioned, and is largely a result of its dividend payments!

In fact, Seagate's TSR outperforms the market, both on the 12 month and 5 year level, by more than double the returns.

Growth Prospects

In their investor presentation (page 21), Seagate is exploring the possibility to deliver an additional US$50+ billion in revenue in the storage as a service, and storage infrastructure segments. For a company that made US$10.19b revenues in the last 12 months, that is quite the jump, and it should be delivering significant growth very soon.

Seagate justifies the possible growth in new rising edge segments that require mass storage and include:

  • Smart Cities - require an estimated 2.5 Petabytes per day

  • Smart Factories - require an estimated 1 Petabytes per day

  • Autonomous Vehicles - require up to an estimated 32 Terabytes per vehicle, per day

  • Human Genomes - require an estimated 100 Gigabytes per genome

It is exciting to see future growth prospects in developing industries, and Seagate has the quality and capacity to meet those industry demands should they materialize.

Conclusion

Seagate seems to be delivering a total stock return that is backed both by growth and dividends. The 78% TSR delivered in the last 12 months is very encouraging, and better than the annualized return of 28% delivered over half a decade.

Comparatively, the US market delivered a 32% gain in the last 12 months, implying that Seagate's increase has more to do with the company performance than with market conditions.

The company is actively engaging an industry that demands their product and has the capacity to deliver future growth.

Investors will need to see a result on Seagate's promises optimally by 2023, and at the latest by 2025. That is sooner than one might perceive, and we hope to see a gradual delivery on these promises with every future earnings call.

But to truly gain insight, we need to consider other information, too. To that end, you should be aware of the 3 warning signs we've spotted with Seagate Technology Holdings.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com