Seagate Technology Poised For Early Cycle Rebound, Says Morgan Stanley Analyst

Analysts at Morgan Stanley upgraded Seagate Technology Holdings PLC STX Wednesday, suggesting that the IT hardware industry is entering the final stages of the late cycle and is poised for an early-cycle rebound.

The Seagate Analyst: Morgan Stanley’s Erik W Woodring upgraded Seagate to an overweight rating from an equal-weight rating, and raised the price target to $69 from $54.

The overconsumption of technology goods from 2020 to 2021 and tightening financial conditions as the primary drivers of slowing demand, among other factors, led to Seagate’s underperformance compared to the S&P 500 in 2022, Woodring says. However, the market is now discounting a significant level of bad news, and the bulk of the late cycle underperformance is likely behind us.

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Morgan Stanley’s analyst believes that we've seen 50-75% of the negative earnings revisions and P/E multiple compression that historically signal the IT Hardware bottom. They also note that IT Hardware net 12 month net income estimates are still ~15% ahead of the average from last cycle, indicating room for further estimate cuts.

Woodring aligned his view with the US Equity Strategy Team's 2023 Outlook for a bust/boom cycle in 2023.

They expect the final leg of late cycle Hardware underperformance to play out in the first half of 2023, driven by a last round of negative earnings revisions and multiple compression. Following this, an early cycle recovery is expected to drive Hardware outperformance later in the second half of 2023.

Final Word: Morgan Stanley’s report suggests that the IT Hardware industry is nearing the end of the late cycle and is set for an early cycle rebound in 2023.

Woodring warns that Morgan Stanley will wait to upgrade their IT Hardware industry view to 'Attractive' until they see evidence that the sector is closer to the bottom, as they are tracking multiple key datasets in its Early Cycle Playbook.

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