Seagate Can Capitalize On Data Growth, Morgan Stanley Says In Upgrade

The market is underappreciating the money behind the growth in data storage, according to Morgan Stanley, and it's made the firm constructive on Seagate Technology PLC STX.

The Analyst

Analyst Katy Huberty upgraded shares of Seagate from Equal-weight to Overweight and increased the price target from $51 to $72, suggesting 28-percent upside.

In a bull-case scenario — if non-HDD margins fully recover after recent restructuring, new management and NAND supply contracts — the analyst sees the shares rising to the $90 level. 

The Thesis

The acceleration of IT budgets and data storage growth in the data era are underappreciated by investors, Hubert said in a Monday note. Seagate benefits from both exponential growth in stored data and the higher margins earned on the near-line drives that support these applications, she said. 

Seagate shares are baking in perpetual decline in residual value, which could prove conservative, the analyst said.

To reflect better sustained near-line growth, a positive mix shift and a relatively stable HDD pricing environment, Morgan Stanley increased its 2019 earnings estimate from $4.86 to $6.

"We model 8-percent higher revenue,a point higher on gross margin, and more operating leverage as the company holds OpEx close to the $375M quarterly target, which net to 23-percent higher EPS," Huberty said. 

The Price Action

Seagate shares have gained about 24 percent over the past year.

The stock was up 8.6 percent at the time of publication Tuesday. 

Related Links:

The S&P 500's Biggest Gainers And Losers In A Turbulent First Quarter

6 Dividend-Trap Stocks That Could Follow Mattel And GNC's Lead, Cutting Or Suspending Payouts