Seagate Earnings: The HDD Recovery Is Underway, but Shares Have Well Exceeded Fundamentals

We maintain our $55 fair value estimate for shares of no-moat Seagate Technology after fiscal second-quarter results aligned with our medium-term recovery thesis. Seagate met our sales expectations for the December quarter and outperformed on profitability. After the hard disk drive, or HDD, market nearly halved across calendar 2022 and 2023, we continue to anticipate a multiyear demand recovery. Seagate’s largest driver is demand in cloud data centers, which rose sequentially for the second quarter in a row off a bottom for sales in June. To us, back-to-back sequential growth exhibits the start of a market recovery. Nevertheless, we see shares as materially overvalued. In our view, Seagate’s stock is already pricing in a full multiyear recovery in HDD demand, but we think the share price has overshot the firm’s fundamental opportunity in the next five years.