On Wednesday, BofA Securities updated its outlook on Seagate Technology (NASDAQ:STX), increasing the stock price target to $110 from the previous $100, while maintaining a Buy rating on the stock. The firm's analyst cited Seagate's recent pre-announcement of earnings, which aligned with the mid-point of its prior guidance.
Although the figures were slightly below the analyst's estimates, Seagate is expected to benefit from the growing cloud demand for hard disk drives (HDDs), particularly as the adoption of Heat Assisted Magnetic Recording (HAMR) technology accelerates.
Seagate's financial position appears promising, with expectations of gross margin expansion by 160 basis points sequentially in both the March and June quarters. The company's earlier price increases and potential further hikes as HAMR drives gain customer qualification contribute to this optimistic outlook.
The analyst emphasized Seagate's strong positioning to capitalize on secular cloud demand trends, revenue and margin recovery from current trough levels, and the transition to higher-capacity HAMR HDDs.
The financial models suggest positive free cash flow (FCF) for Seagate in fiscal years 2024 and 2025, despite the possibility of FCF lagging behind profitability due to the unwinding of working capital.
Capital expenditures (capex) are projected to decrease to $212 million in FY24, a reduction from $316 million in FY23, with a significant portion already incurred in the first half of FY24. This trend of lowering capex is expected to continue in subsequent years.
As a result of these factors, the firm has adjusted its revenue and earnings per share (EPS) estimates for Seagate. The new price objective of $110 is based on a 13 times multiple of the estimated calendar year 2025 EPS of $8.34, which is a slight increase from the prior multiple of 12.
The firm acknowledges Seagate's management's commitment to maintaining dividend levels and keeping debt below $5 billion, after which the company may consider resuming share buybacks.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.