Evercore Turns Bearish On Seagate Due To Limited Upside

Shares Seagate Technology PLC STX have seen an "excellent run" in 2018, but industry-wide HDD headwinds now warrants a bearish stance on the stock, according to Evercore.

The Analyst

Evercore ISI's C.J. Muse downgraded Seagate from In Line to Underperform with a price target lowered from $55 to $45.

The Thesis

The bearish case for Seagate's stock rests partially on the belief that the NAND market has become "a bit complacent" in terms of pricing, especially in terms of demand elasticity and increasing HDD cannibalization, Muse said in a note. In fact, increasing price competition within QLC NAND could shift from a positive factor to a headwind into 2019 and create a scenario where Seagate's topline growth will be flat under a best-case scenario while gross margins move lower.

Meanwhile, the stock's approximate 5 percent dividend yield offers investors a certain degree of yield support but this is overshadowed by expectations for declining gross margins and negative revisions to consensus estimates next year, the analyst wrote.

Muse said Seagate's stock valuation needs to be put in perspective as its valuation implies a 10.9 times EVE/PS multiple on 2019 estimates, which is a premium to Micron Technology, Inc. MU at 10.2 times. As such, Micron would be the better stock pick among the two given its more attractive valuation but also a solid demand for DRAM and a favorable supply-demand balance and expectations for incremental capital returns in the future.