Revenue is down 21% year over year in the quarter ended in March, while operating income has been down 8% and 62%, and net income 13% and 64% year over year in the last two quarters. In addition, total units shipped have been declining in the last four quarters — (by millions) 61, 58, 58 and 56.
HDDs still reign supreme
However, despite these concerns, many also believe that the predictions about the HDD industry’s eventual fall have been overblown. They point out to the continued healthy growth of HDD shipments the past couple of years as it remained the preferred digital storage medium of choice for most businesses and individuals.
Furthermore, there are several key reasons why demand for HDDs will continue to grow in the future:
1). SSDs are still at least 10 times more expensive per gigabyte than HDDs. Unless the cost of producing SSDs considerably drops soon, HDDs will still be the more cost-effective choice to store mass data.
2). The proliferation of content-rich devices such as tablets, smartphones, DVRs, game consoles, digital cameras and digital music players will drive the rapid growth of digital content requiring increasingly higher storage capacity.
3). Lastly, the shift to cloud computing and to mobile will drive the demand for high capacity storage even more.
Foolish bottom line
Seagate is a very good company with a great track record, but like most technology companies, there is a lot of uncertainty in its future. It is currently trading at relatively low valuations due in part because of the uncertainty surrounding HDDs long term and also because of its recent spike in profitability.
In 2011, the global supply of HDDs decreased because of the damage caused by floods to HDD manufacturing facilities in Thailand where a majority of HDDs are made. This increased Seagate’s sales and average selling price per unit in 2012 enabling the company to post a record operating margin of 21%, a lot higher than its historical operating margins of 5%-11% from the past 10 years.
However, even if profitability normalizes soon, Seagate remains relatively cheap for a high-quality company. It virtually operates in a duopoly with Western Digital, giving it economies of scale and pricing power, which enable it to generate high levels of cash flow and return on capital. The big question is whether it can sustain its business model or if it can adapt to the new technology when the time comes.
I believe it can. The notion that SDDs will eventually replace HDDs is quite overblown. The growth of mobile devices and rich data content ensures the demand for mass storage will grow even more and it would be too costly to use SSDs to store all this data. Therefore, HDDs will remain the cost-effective choice for businesses and individuals for their storage needs in the next couple of years, at least. Thus, I think now is a good time to buy Seagate.
The article Seagate: A Great Past, But Is There a Future? originally appeared on Fool.com and is written by Zarr Pacificador.
Zarr Pacificador has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital. Zarr is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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