Data storage manufacturer Seagate (NASDAQ:STX) reported Q3 CY2024 results beating Wall Street’s revenue expectations, with sales up 49.1% year on year to $2.17 billion. The company expects next quarter’s revenue to be around $2.3 billion, close to analysts’ estimates. Its non-GAAP profit of $1.58 per share was also 8.6% above analysts’ consensus estimates.
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Seagate Technology (STX) Q3 CY2024 Highlights:
- Revenue: $2.17 billion vs analyst estimates of $2.13 billion (1.9% beat)
- Adjusted EPS: $1.58 vs analyst estimates of $1.46 (8.6% beat)
- EBITDA: $498 million vs analyst estimates of $493.9 million (small beat)
- Revenue Guidance for Q4 CY2024 is $2.3 billion at the midpoint, roughly in line with what analysts were expecting
- Adjusted EPS guidance for Q4 CY2024 is $1.85 at the midpoint, above analyst estimates of $1.69
- Gross Margin (GAAP): 32.9%, up from 11.1% in the same quarter last year
- Inventory Days Outstanding: 87, down from 88 in the previous quarter
- EBITDA Margin: 23%, up from 8% in the same quarter last year
- Free Cash Flow Margin: 1.2%, down from 3.9% in the same quarter last year (large miss)
- Market Capitalization: $23.66 billion
"Seagate is off to an outstanding start to the fiscal year, highlighted by gross margin expanding to the highest level in more than a decade," said Dave Mosley, Seagate’s chief executive officer.
Company Overview
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.
Memory Semiconductors
The rapid growth in data generation and the need to support increases in processing power for everything from consumer devices to data center servers are driving the demand for memory chips. From the content delivery networks and edge computing to the cloud, data storage is a key component underpinning the global technology architecture. On top of that, secular growth drivers like machine learning and the boom in media-rich digital content are further accelerating the need for storage. Like all semiconductor segments, memory makers are highly cyclical, driven by supply and demand imbalances and exposure to consumer product cycles.
Sales Growth
Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Seagate Technology’s demand was weak over the last five years as its sales fell by 6.1% annually, a rough starting point for our analysis.
Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
Long-term growth is the most important, but recency is neccessary for semiconductors because of Moore's Law, which suggests the pace of technological innovation is so high that yesterday's hit new product could be obsolete today. Seagate Technology’s recent history shows its demand has stayed suppressed as its revenue has declined by 17.1% annually over the last two years.
This quarter, Seagate Technology reported magnificent year-on-year revenue growth of 49.1%, and its $2.17 billion of revenue beat Wall Street’s estimates by 1.9%. Management is currently guiding for a 47.9% year-on-year increase next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 31.6% over the next 12 months, an acceleration versus the last two years. This projection is healthy and shows the market believes its newer products and services will fuel higher growth rates.
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Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity 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.
This quarter, Seagate Technology’s DIO came in at 87, which is 17 days above its five-year average. These numbers suggest that despite the recent decrease, the company’s inventory levels are higher than what we’ve seen in the past.
Key Takeaways from Seagate Technology’s Q3 Results
We were impressed by Seagate Technology’s optimistic EPS forecast for next quarter, which blew past analysts’ expectations. We were also glad its gross margin improved. On the other hand, free cash flow missed by a large amount. Zooming out, we still think this was a solid quarter. The market seemed to focus on the negatives, though, and the stock traded down 3.5% to $108.70 immediately after reporting.
Big picture, is Seagate Technology a buy here and now?When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.
