Morgan Stanley: Seagate shipment growth misses expectations as price increases temporarily offset cost pressure

Why did strong results still lead to revisions in expectations?

In the first quarter of fiscal 2027, the quarter ending in September 2026, Seagate reported revenue of 4.233 billion dollars and adjusted earnings per share of 7.68 dollars, above Morgan Stanley’s respective estimates of 4.163 billion dollars and 7.50 dollars.
Although nearline hard-drive shipment capacity reached a record 198 EB, it rose only 2% sequentially, below the bank’s expectation of 6%. A higher share of smaller-capacity drives for enterprise equipment makers, along with the company’s advance inventory buildup for more customer qualifications and the Mozaic 4 ramp-up, weighed on shipment capacity growth.
The company guided for adjusted earnings per share of 9.20 dollars, plus or minus 0.20 dollars, for the December quarter. The midpoint was above the market consensus at the time of 8.66 dollars but below buy-side expectations of 9.50–10 dollars.

The price per TB rose 16% sequentially in the September quarter, up from 6% in the June quarter. Morgan Stanley believes a widening supply-demand gap and customers’ priority on securing capacity enabled Seagate to sell at higher prices; management said it had not yet seen demand hurt by the price increases.
Cost performance was weaker than expected: cost per TB rose 3% sequentially and fell only by a mid-single-digit percentage year over year, compared with an average year-over-year decline of about 15% in the previous four quarters. Higher prices for externally purchased memory and other components partly offset improvements in internal efficiency.
Seagate incorporated expected external cost increases into pricing, and overall gross margin in the September quarter still rose to 57.8% from 52.7% in the prior quarter. Management expects gross margin to continue expanding sequentially throughout fiscal 2027, but component cost pressure is also expected to persist.

Management expects shipment capacity to rebound significantly sequentially in the December quarter as more customers qualify the 40 TB Mozaic 4 HAMR drive, but gave no specific growth figure. The time required to qualify high-capacity drives is an important condition for the pace of this growth.
Seagate said that, with hard-drive unit production essentially flat, capital expenditure held at 4%–6% of revenue could still support approximately 25% annual capacity growth by increasing areal density, or storing more data in the same area. The company favors adding supply through technology rather than substantially expanding the number of drives.
Morgan Stanley noted that most of Seagate’s nearline hard-drive capacity has already been allocated through calendar 2028, and customers are also signing long-term agreements extending through calendar 2030 to secure future supply.

Because shipment growth and cost reductions were weaker than expected, Morgan Stanley lowered its earnings-per-share forecasts by approximately 2%–4% after the results and cut its price target from 1200 dollars to 1148 dollars. The new target is based on 15 times the bank’s fiscal 2028 earnings-per-share forecast of 76.64 dollars.
The bank maintained its Overweight rating and top-pick designation, citing hard-drive demand continuing to outpace supply, stronger pricing and HAMR progress in line with its expectations. The company also expects to increase buybacks significantly starting in the March 2027 quarter after repaying debt, and said its long-term goal is to return approximately 75% of free cash flow to shareholders.
This assessment is sensitive to high-capacity drive qualification, gross-margin expansion and the durability of pricing. If qualification is slower than expected or prices normalize more than expected, both growth and earnings prospects could come under pressure.