Why Seagate Technology Soared Double Digits Today
Shares of Seagate Technology (NASDAQ:STX) , a producer of hard disk drives (HDDs), soared as much as 11.1% today, before settling into a mid-single-digit daily gain as of noon EST.
While computer hard drives don’t exactly scream out excitement, Seagate’s recent stock performance has been a thrill ride. Today’s gain comes on top of a great post-earnings run, ever since Seagate beat analyst expectations for revenue, earnings per share, and December quarter guidance on Oct. 22. Since that time, the stock is up roughly 40% in less than a month.
Yesterday, a new technology breakthrough helped propel Seagate another leg higher.
On Thursday, Seagate unveiled new technology that integrates hard disk drives with the NVMe protocol of the PCIe interface. PCIe, or peripheral component interconnect express, is an increasingly popular interface that connects various computing components such as graphics cards and storage to a host. NVMe, or nonvolatile memory express, is the protocol that regulates communication between the PCIe storage medium and the host.
Until now, the NVMe PCIe protocol had only been compatible with solid state drives (SSDs), which use NAND Flash technology. NAND is a newer type of storage that is faster and more flexible than hard disk drives, though it is still a bit more expensive than they are. The cost of each storage medium is falling, but HDDs have still retained a cost advantage for large, bulk storage.
Still, because of fears that HDDs could lose market share to NAND flash in the years ahead, Seagate, which only produces HDDs, not NAND (though it does make SSDs with third-party NAND modules), has tended to trade very cheaply. So new innovation that can strengthen the case for HDDs and extend the useful life of the technology could mean big things for Seagate’s value.
Even after its recent run, Seagate only trades around 12.5 times next year’s earnings estimates, and its dividend still yields around 2.4%. That may seem way cheaper than the market, but those metrics are actually more expensive than Seagate has traded in the last five years or so.
The massive demand for storage from cloud computing companies, as well as streaming video applications, has helped sustain Seagate’s financials, even has many PCs and consumer applications switch to NAND Flash. While growth investors may not find much that’s exciting here, Seagate, as only one of three HDD producers in the world, should continue to generate lots of cash flow, along with share repurchases and a rising dividend.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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