Shares of Seagate Technology Public Limited Company STX plunged to a new 52-week low of $41.69 on Sep 28. This storage solutions provider eventually closed at $42.07, representing a year-to-date decline of 34.9%. Average volume of shares traded over the last three months was more than 5,046k.
Why the Plunge?
Seagate’s recent share price drop can be attributed to its announcement of workforce reduction amid bleak business outlook and Gartner’s lowered forecast for worldwide device shipment in 2015.
Seagate, on Sep 10, announced its decision to cut the global workforce by 2% or about 1,050 positions. The move, according to the company, is part of its restructuring plan and “intended to realign its cost structure with the current macroeconomic business environment”.
Seagate derives a bulk of its revenues from the sale of hard-disk drives (HDD) mainly used by PC manufacturers. The company is the second largest manufacturer of HDDs in the U.S. with 40% market share following Western Digital Corporation’s (WDC) 44%.
However, with the persistent decline in PC sales, Seagate’s HDD shipments have also been affected, in turn, leading to lower revenues. The storage solution provider’s fourth-quarter fiscal 2015 revenues dropped 11.3% year over year due to weaker-than-expected product demand.
We believe that the cannibalization of PCs by mobile devices have been affecting the HDD maker’s results. Per Gartner, PC shipments in second-quarter 2015 fell 9.5% year over year to 68.4 million units, marking the worst slump since third-quarter 2013. The declining numbers indicate long-term weakness in PC HDDs as well, which remains an overhang on Seagate’s financials.
Adding to the woes, in its Sep 2015 report Gartner stated that PC shipments (including premium ultramobiles) are expected to fall 7.3% to 291 million units in 2015 primarily due to the lack of device replacement and strong dollar. The premium ultramobiles category includes tablets and clamshells such as Apple Inc.’s AAPL iPad and iPad mini, Google Inc.’s GOOGL Nexus 7 and Samsung Galaxy Tab S 10.5.
This compared unfavorably with the July prediction of 4.5% decline as a result of persistent slowdown in purchase in Western Europe, Russia and Japan due to local currency devaluation against the U.S. dollar.
In its July report, Gartner had stated that PC purchases in the first half of 2015 were negatively impacted by the end of the migration from Windows XP. Furthermore, it had predicted that the demand for PCs may remain sluggish for the rest of the year as enterprises postpone purchases to test the long-term effectiveness of Windows 10 before deploying.
However, Gartner is hopeful that the situation will change in 2016. According to Ranjit Atwal, research director at Gartner, “In 2016, we expect currency impacts to negate and while Windows 10 products on the Intel Skylake platform will increase in volumes throughout the year, Windows 10 adoption among businesses will ramp up sharply in 2017, where we expect the PC market to return to a 4% growth".
What’s the Scope for Seagate?
The declining PC industry has also affected part suppliers and allied industries that mostly depend on PC sales for revenue generation. So Seagate is focusing on the enterprise side which offers higher-margin business opportunity.
Storage for enterprises is a key growth area in the information technology sector. Anticipating a potential acceleration in cloud deployments backed by exponential growth in cloud data storage, Seagate has stepped up investment in high-capacity storage devices that would support the expansion of cloud infrastructure and applications.
Last year, Seagate acquired the Accelerated Solutions and Flash Components divisions from Avago Technologies Ltd. AVGO to boost its enterprise-class PCIe flash offerings. Moreover, last month, the storage device maker signed a definitive agreement to take over Dot Hill Systems Corp. which designs, manufactures and markets a wide range of software and hardware storage systems, including hybrid storage arrays, for clients ranging from SMBs to enterprise.
Seagate also believes that higher demand for cloud storage will improve pricing for enterprise-class drives, mainly because of supply constraints. The company expects cloud-based solutions to drive near-term revenue growth.
Seagate’s projections stem from the fact that IDC expects 60% of the 13 Zettabyte (ZB) data produced by 2020 to be stored on the cloud. Apart from this, the focus shift toward enterprise would reduce this Zacks Rank #3 (Hold) stock’s dependence on the PC market.
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