On Tuesday, Evercore ISI initiated coverage on Seagate Technology (NASDAQ:STX) with an Outperform rating and a share price target of $110.00.
The firm believes that Seagate is well-positioned to benefit from several factors, including a cyclical recovery with hyperscalers, margin expansion from scaling up Heat Assisted Magnetic Recording (HAMR) technology, a more disciplined hard disk drive (HDD) marketplace, and a capital allocation strategy that favors buybacks.
According to Evercore ISI, Seagate has the potential to reach an earnings per share (EPS) power of $10-12 by fiscal year 2027, which suggests a significant upside from current levels. The firm points out that Seagate is currently ramping up HAMR technology with one hyperscaler, Google (NASDAQ:GOOGL), with expectations to expand to others like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) through the calendar year 2024, followed by Meta (NASDAQ:META).
The analysis also highlights that Seagate's gross margins could increase to mid-30% at scale with HAMR technology, noting a similar expansion of over 500 basis points when the company shifted to Shingled Magnetic Recording (SMR) technology.
Additionally, Evercore ISI anticipates that Seagate will be able to generate more than 30% gross margins and over 18% EBIT margins on a $2.5 billion run rate by the end of fiscal year 2025.
Evercore ISI projects that Seagate will achieve an EPS of over $5.00 in fiscal year 2025, which is higher than the street's estimate of $4.70, suggesting that the street may be underappreciating the incremental margins going forward. The firm also notes that a more levered Western Digital (NASDAQ:WDC) HDD asset will contribute to better industry discipline.
In summary, while acknowledging the cyclical nature of the HDD industry and Seagate's business, Evercore ISI expects the upcoming upcycle to be more favorable than street expectations, potentially leading to a stronger gross margin and EPS recovery through the calendar year 2024.
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