3 Reasons Why Goldman Turned Bearish On Seagate Technology

Seagate Technology PLC STX deserves credit for improving its product offerings over the past few years to take advantage of an improved hard disk drive market, but a bearish stance is called for, according to Goldman Sachs. 

The Analyst

Goldman Sachs' Mark Delaney downgraded Seagate Technology from Neutral to Sell with a price target lowered from $50 to $44.

The Thesis

The bearish case for Seagate Technology is threefold, Delaney said in the downgrade note. (See the analyst's track record here.) 

• The company's fundamentals are likely to peak in the back half of 2018 and then decline in 2019 due to an oversupply of NAND and falling SSD prices, Delaney said. This is notable for Seagate, as an estimated 50-60 percent of total gross profit comes from markets that are directly impacted by weakness in SSD pricing or NAND, he said. 
• Seagate succeeded in lowering its cost structures exiting the 2015/2016 HDD downturn, which implies cost savings are a tailwind that will dissipate, the analyst said. The company's $385-million operating expenditure target for the fourth quarter is 30 percent lower than the first quarter of 2015, but revenue is down by about 15 percent over the same time period, he said. 
• Seagate's stock is trading at a two-turn premium on a forward P/E basis compared to its closest peers, which can't be justified given the risk in Seagate's business model, Delaney said. 

Price Action

Seagate Technology shares were plunging 7.27 percent to $51.04 at the time of publication Thursday.  

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