Seagate's Recovery Hindered by Weak Demand and Inventory Excess, Analyst Warns in Q3 Preview

Wedbush analyst Matt Bryson reiterates Seagate Tech Holdings Plc STX with a Neutral and $55 price target.
During Q2 earnings, management guided for nearline shipments to ramp through CY2023, with underutilization charges easing along the ramp. The analyst had also suggested that evidence of a bottom was enough to boost the stock, particularly given the promise of HAMR gaining traction in the out years following initial volume shipments in mid'23.
However, a modest CQ1 improvement does not appear to have played out, the analyst points out in a Friday note titled "FQ3'23 Preview - Recovery Story Delayed." Instead, hyperscale and CSP server build softened through CQ1, limiting demand and reducing excess HDD inventory, with industry nearline shipments likely holding just flat or even dipping Q/Q.
Such a result would fit with his conversations throughout the quarter, suggesting some cuts in HDD component requirements starting around the mid-quarter.
As such, the analyst sees a modest STX Q3 miss as likely and hypothesizes STX's Q4 outlook will fall shy of current Street expectations, particularly with utilization charges expected to linger at higher levels through the current quarter.
The analyst has been focused on signs of softening semi/hardware demand for some time, but stocks have consistently shrugged off negative data points.
Seagate, in particular, already has signaled a likely miss (both by announcing another round of cost reductions and by forecasting continued higher underutilization charges through Q4.
However, given how well it has held up despite the negative foreshadowing around likely results, the analyst struggled to see a significant adverse reaction for the stock.
At the same time, with near-term numbers likely moving lower, the analyst is hard-pressed to get more constructive on the name into earnings, particularly given some likely intermediate-term challenges.
Western Digital Corp WDC should maintain an intermediate-term areal density advantage that could weigh STX's results.
The analyst believes meaningful traction with HAMR is likely at least one generation away.
With STX trading above the 10X to low teens multiple, the analyst struggles to justify a more positive outlook today and maintains his stance on the sidelines.
Price Action: STX shares closed lower by 2.13% at $63.96 on Friday.

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