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Here's Why Should You Hold on to Seagate (STX) Stock for Now

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At times, it is prudent to retain certain stocks that have enough potential but are weighed down by tough market conditions. Seagate Technology Plc (STX - Free Report) seems to be one such stock, which investors need to retain if they are looking to reap long-term gains. Though the stock faces several headwinds at the moment, these are transitory in nature. There is enough scope for this Zacks Rank #3 (Hold) company to rebound in the long run.

Seagate’s stock has surged 31.5% in the past three months, substantially outperforming the 12.9% rally of the industry.

What’s Going in Seagate’ Favor?

Seagate reported impressive fiscal first-quarter 2018 results. Non-GAAP earnings per share came in at 96 cents, surpassing the Zacks Consensus Estimate of 86 cents per share. Revenues of $2.63 billion also topped the Zacks Consensus Estimate of $2.56 billion. Moreover, both the top and bottom-line figures witnessed a sequential improvement, primarily driven by strong demand and adoption of Seagate’s storage drives.

The company also participated in a Bain Capital led consortium. The consortium has entered into an agreement with Toshiba for the acquisition of Toshiba Memory Corporation. Seagate has committed $1.25 billion for the takeover, which is scheduled for March 2018.

This participation will enable Seagate to enter into an agreement with Toshiba, per which the latter will provide Seagate with NAND supply, consequently helping in its innovation of hard disk drives (“HDD”), solid state drives (“SSD”) and hybrid solutions.

Recently, the company also announced that IronWolf, IronWolf Pro and Barracuda Pro — which are part of the Guardian Series of hard disk drives — are now available in capacity of up to 12 terabyte (TB). Seagate believes that the expanded capacity will improve demand for the HDDs among large enterprises, small and medium size businesses (SMBs) as well as creative professionals.

Market research firm IDC forecasts that by 2025, the global datasphere will grow to 163 zettabytes (trillion gigabytes), which is ten times the 16.1 zettabytes (ZB) of data generated in 2016. More importantly, almost 20% of this will be critical to daily lives and nearly 10% of that will be hypercritical.

This massive volume of data presents significant growth opportunity for enterprises. However, effective storage is absolutely necessary to properly harness this data. This presents significant growth opportunity for Seagate in the long term.

Notably, with the huge transformations in the storage industry, mobile cloud is taking the center stage. This in turn has boosted the deployment of high-capacity mass storage products, which is beneficial for Seagate.

The company’s efforts in the improvement of areal density with the ramping up of its heat assisted magnetic recording (“HAMR”) technology, which is expected be shipped in 2019, is yet another positive.

Moreover, collaborations with the likes of Tencent and Baidu (BIDU - Free Report) are anticipated to boost Seagate’s foothold in China.

Moreover, the stock looks attractive from a valuation perspective. This is because Seagate currently trades at a forward P/E of 10.14x compared with the industry group average of 15.70x, which signifies a huge upward potential.

The stock’s long-term earnings per share growth rate is 18.9% and it carries a VGM Style Score of A.

Concerns Remain

Weak PC shipment in the third quarter as evident from Gartner and IDC’s recently released data is a major concern for Seagate. Both agreed that shortage of key components, including DRAM, SSD and LCD panels, is escalating PC prices, thereby thwarting overall demand.

Seagate is a hard disk drive manufacturer and is primarily dependent on PC sales. We note that a decline in PC shipment reflects weak demand, which doesn't bode well for the company.

Going forward, Seagate has been losing HDD market share amid significant competition from Western Digital Corp. Despite a number of acquisitions, the company also doesn’t have significant presence in the flash memory market.

Stock to Consider

Better-ranked stocks in the broader technology sector are NVIDIA Corporation (NVDA - Free Report) and Intel Corporation (INTC - Free Report) , both sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NVIDIA and Intel have a long-term earnings per share growth rate of 10.3% and 8.4%, respectively.

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