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Is The Seagate Technology Rally On Its Last Legs?

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Seagate Technology (STX) is still going strong. Its shares saw a sharp boost on the heels of its strong quarterly earnings release on April 22, with it up 9% since then.

This provider of electronic data storage technology and solutions has many factors working in its favor. Demand remains strong for data storage, earnings results have beaten estimates, and guidance remains in line with analyst expectations.

That being said, with prices around $90 per share, Seagate may be topping out, at least in the near-term. Its valuation looks reasonable on an absolute basis. Yet, given the cyclical nature of the industry, combined with the company’s slower-than-average top-line growth, its current forward P/E ratio may fully reflect its underlying value.

Shares will likely hold on to the lion’s share of their recent gains, but the stock is unlikely to break into triple-digit price levels anytime soon.

Seagate Technology And Recent Results

For the fiscal quarter ending Apr 2, 2021, Seagate delivered results that were ahead of expectations. Earnings per share (EPS) came in at $1.48, above the sell-side consensus estimate of $1.30. Revenue for the quarter also came in above projections, albeit only slightly.

This news has helped to give STX a continued boost, although when the numbers initially hit the Street, the markets had a mixed reaction. The quarterly results were positive, but investors were cautious due to the company’s lukewarm guidance for the upcoming quarter.

Projected sales for the next quarter are now around $2.85 billion. This is in line with analyst estimates of around $2.86 billion in revenue for the quarter ending July 2, 2021.

Earnings projections for Seagate’s fiscal 4Q, at $1.45-$1.75, are also in line with analyst numbers, which are at $1.55. This may be sufficient to sustain the stock at around $90 per share. But this, coupled with other factors, may signal that the stock is about to cool off. (See Seagate Technology stock analysis on TipRanks)

Short-Term Gains Could Be Limited

Demand is strong for Seagate’s data storage solutions, shares pay a relatively high dividend (forward yield of around 3%), and its valuation is more than moderate. Even so, these positives are unlikely to lead to dramatically higher prices for STX stock.

While Seagate's valuation is reasonable, its current P/E multiple is in line with peers in this more cyclical segment of the overall chip space. Seagate's largest segment, HDD (hard disc drive), has not been growing in the market overall. Its other main segment, Enterprise Data Solutions, SSD, and Other, is growing, but represents only 9% of its revenues. Therefore, Seagate has minimal potential for multiple expansion.

What Analysts Are Saying About STX Stock

According to TipRanks’ analyst rating consensus, STX stock comes in as a Moderate Buy. Out of 18 analyst ratings, there have been 11 Buys, 6 Holds and 2 Sells published.

As for price targets, the average analyst price target on STX stock today is $87.42 per share, implying around 3.52% downside potential from today’s prices.

Bottom Line

Investors looking for a stock to buy and hold for several years may find this interesting. For those with a shorter time horizon, the opportunity for big gains may be limited.

Despite its recent strong run, don’t expect STX stock to rise much higher than today’s price levels over the next few months.

Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.