How did results and guidance compare with expectations?

  • Seagate reported quarterly revenue of 4.233 billion dollars, above Goldman Sachs’ estimate of 4.196 billion dollars and the market consensus of 4.141 billion dollars. Operating earnings per share were 7.68 dollars, also above market expectations of 7.42 dollars. Gross margin was 57.8%, close to the market expectation of 57.6%.
  • Guidance for the next fiscal quarter was stronger: the revenue midpoint of 4.8 billion dollars exceeded market expectations of 4.5 billion dollars, while the midpoint of operating earnings per share guidance was 9.20 dollars, above the market expectation of 8.54 dollars. The company expects an operating margin of around 55%, compared with the market expectation of 52.9%.
  • However, investor expectations for Seagate were already high after Western Digital previously reported strong results. Goldman Sachs believes that, although quarterly results were broadly in line with expectations and guidance was strong, the stock could still fall slightly.

What supports growth and margins?

  • Hard-drive capacity shipments rose 21% year on year during the quarter, while the price per EB of capacity increased by about 33% year on year. The company expects capacity growth to accelerate again in the quarter ending in December and reach about 25% over the medium term, with strong pricing trends continuing into fiscal 2027.
  • Data-center revenue was 3.449 billion dollars, slightly above market expectations of 3.393 billion dollars. Management expects both revenue and margins to rise sequentially in each quarter of fiscal 2027; Goldman Sachs believes the ramp-up of HAMR technology will help support profit growth from incremental revenue.
  • HAMR is a hard-drive recording technology. Seagate is advancing production of Mozaic 4 with two hyperscale cloud customers and plans to have more customers complete qualification in the coming months. The company expects HAMR shipments to exceed those of conventional PMR hard drives by the end of 2026; Goldman Sachs expects HAMR to account for about 70% of shipments in 2027.

How does industry capacity expansion affect the outlook?

  • Goldman Sachs’ conversations with investors found that tight hard-drive supply and demand and a rising share of high-capacity products supported positive expectations; however, a smaller competitor could substantially increase capacity, also creating pressure.
  • Management believes increased shipments from the competitor are unlikely to disrupt the industry’s supply-demand balance; Goldman Sachs speculates that the competitor is Toshiba. Goldman Sachs also lists a lack of supply discipline by the industry or Seagate itself, and obstacles to HAMR qualification at major cloud customers, as downside risks.

Why was the price target cut despite higher earnings estimates?

  • Driven by improving revenue and gross-margin trends, Goldman Sachs raised its earnings-per-share forecasts by an average of about 11% and maintained its buy rating. The company repaid approximately 775 million dollars of debt during the quarter and another 750 million dollars of senior notes after quarter-end. It expects to reach a net cash position by the end of 2026 and plans to increase buybacks substantially starting in 2027.
  • Goldman Sachs cut its 12-month price target from 960 dollars to 900 dollars. Its normalized earnings-per-share estimate rose from 40 dollars to 45 dollars, but the price-to-earnings multiple it applied fell from 24 times to 20 times because peer valuation multiples declined. The higher earnings forecast therefore failed to offset the lower valuation multiple.