Seagate Surges 81.8% YTD: Should STX Stock Be in Your Portfolio?
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The company has outperformed its competitors in the storage space, like Western Digital Corporation (WDC), Pure Storage (PSTG), and NetApp, Inc. (NTAP). WDC has gained 27.3%, while PSTG and NTAP have declined 5% and 6.1% during the same time frame.
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Western Digital is a diversified storage company with a broader portfolio that includes both traditional HDDs and NAND-based SSDs. NetApp provides enterprise storage as well as data management software and hardware products and services. It assists enterprises in managing multiple cloud environments, adopting next-generation technologies like AI, Kubernetes, and contemporary databases, and navigating the complexity brought about by the rapid development of data and cloud usage.
Pure Storage is redefining enterprise storage by delivering innovations designed to meet the demands of modern data workloads, especially in areas like AI, containerization, and high-performance computing.
STX's Major Tailwinds
Seagate is experiencing a surge in demand for mass capacity storage, with nearline cloud storage demand accelerating. In the last reported quarter, revenues from mass capacity devices jumped 40% year over year to $2 billion, driven by stronger nearline cloud demand and rising nearline enterprise sales. In the June quarter, nearline drives made up 91% of the total mass capacity exabytes shipped. The increasing demand for mass-capacity storage continues to align with cloud investment cycles and the expansion of AI-ready data center infrastructure.
Cloud service providers (CSPs) are increasingly focusing on developing and deploying AI applications while expanding their cloud infrastructure. Seagate believes HDDs will be crucial in supporting these stages of AI adoption and expects HDD demand to accelerate further. As data rapidly grows, the need for mass capacity storage is expanding beyond cloud environments into edge data centers. More data is being generated at the edge, stored longer, and replicated across multiple locations to support AI models. With approximately 50% of global data centers located in just four countries, evolving data sovereignty laws are driving demand for local storage solutions.
In this context, mass capacity hard drives offer the right balance of space, efficiency, and cost, helping to ensure data security and compliance. Seagate anticipates that enterprise edge storage will follow the cloud trend, with AI investments driving long-term demand. Management expects fiscal first-quarter revenues to be around $2.5 billion (+/- $150 million), representing a roughly 15% year-over-year growth at the midpoint. The company continues to see strong demand for high-capacity nearline products from cloud customers worldwide.
One of the main drivers of Seagate's strategic plan is the ramp-up of its HAMR technology to meet increasing demand from cloud customers. Its HAMR-based Mozaic drives are the industry's only products offering 3 terabytes per disk. Seagate is increasing volume production of Mozaic 3+ products by utilizing common features across its PMR and HAMR platforms. Shipments are expanding to more CSPs in the September quarter, with qualifications progressing smoothly.
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Key global CSP qualifications are on track for mid-2026. The top priority for fiscal 2026 is qualifying and ramping the 4+ terabyte per disk platform, supporting capacities up to 44TB for cloud and smaller sizes for edge applications. Qualification with a global CSP has started, and volume ramp-up is expected in the first half of 2026, aligning with plans for HAMR exabyte shipments in the second half.
In addition, management is steadily progressing with 5TB per disk technology, aiming for a market launch in early 2028. Lab demonstrations of 10TB per disk are also anticipated around that time. Continuous innovation in media and photonics is essential to this progress. Seagate's technology approach stays closely aligned with changing market trends.
Anchored by the growing adoption of its high-capacity nearline products and the continued execution of pricing initiatives, STX delivered a record gross margin of 37.9%, representing an improvement of approximately 700 basis points year over year.
STX's Headwinds Hurt
Seagate generates a significant portion of its revenues outside the United States, making it vulnerable to currency fluctuations, especially with the euro and pound, which can impact its financial results.
STX is under pressure from intense rivalry in the data storage market, not only from other HDD and SSD makers but also from providers of storage subsystems, including electronic manufacturing services and contract manufacturers. Beyond competitive challenges, the company continues to grapple with broader macroeconomic uncertainties and persistent supply chain volatility.
High debt remains an issue. As of June 27, 2025, cash and cash equivalents totaled $891 million, while long-term debt (including the current portion) was $5 billion. Although Seagate produces strong cash flow, its leverage could limit its ability to sustain dividends, pursue acquisitions, or resume share buybacks.
Estimate Revision Trend of STX
STX is currently witnessing an uptrend in estimate revisions. Earnings estimates for fiscal 2026 have increased 2.3% to $10.12 over the past 60 days, while the same for fiscal 2027 has gone up 4.9% to $12.61.
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Key Valuation Metric of STX
From a valuation standpoint, STX appears to be trading relatively cheaper compared to the industry but trading above its mean. Going by the price/earnings ratio, the company shares currently trade at 14.77 forward earnings, lower than 20.61 for the industry but above the stock's mean of 11.84.
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End Note
Seagate's structural business model changes, coupled with a robust product pipeline, position the company to drive stronger profitability and cash generation in fiscal 2026. Demonstrating its confidence, the company expects to resume share repurchases later this quarter, further enhancing capital returns to shareholders.
However, shifting macro dynamics affected by evolving trade and tariff policies, high debt load and cut-throat competition remain major worries. With a Zacks Rank #3 (Hold), STX appears to be treading in the middle of the road, and new investors could be better off if they trade with caution. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here
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This article originally published on Zacks Investment Research (zacks.com).
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