Why did shipments miss expectations, and what comes next quarter?

  • Seagate’s nearline hard drive capacity shipments rose 24% year over year in the first quarter of fiscal 2027, below Wells Fargo’s previous forecast of 34%. The company attributed this to product transitions and deployment arrangements for Mozaic 4 drives.
  • Wells Fargo expects nearline capacity shipments to grow 31% year over year in the second fiscal quarter and is optimistic about the Mozaic 4 platform ramping up sequentially throughout fiscal 2027. The company maintained its plan to manage long-term supply at an annual compound growth rate of approximately 25%.
  • The company expects HAMR-based drives to account for approximately 50% of annualized nearline capacity shipments by the end of 2026, up from 40% in the quarter ended in June; Mozaic 4 accounts for approximately half of HAMR shipments. Qualification shipments of Mozaic 5 are planned for the end of 2027.

How are price increases lifting profits, and what constraints do costs pose?

  • The blended average selling price per TB rose 16% quarter over quarter in the first fiscal quarter, and gross margin reached 57.8%, above the market expectation of 57.5%. However, some of the acceleration in price increases came from inflation in externally sourced components; the company disclosed that cost of goods sold per TB also rose 3% quarter over quarter.
  • The company guided for second fiscal quarter revenue of $4.7 billion to $4.9 billion and earnings per share of $9.00 to $9.40, both above Wells Fargo’s prior forecasts of $4.448 billion and $8.49, respectively, and the prior market expectations of $4.492 billion and $8.49.
  • Based on the guidance, Wells Fargo estimates second fiscal quarter gross margin at approximately 60% to 61%, with gross margin on incremental revenue above 80%. Its gross margin forecast for calendar 2028 rose further to 71%.

How do long-term agreements and capital spending affect the growth outlook?

  • Seagate said that under long-term agreements, the vast majority of its nearline supply has been allocated through calendar 2028, with planning extending beyond 2030. Product configurations and prices have been set through 2027, and the company expects to begin finalizing 2028 pricing terms over the next several quarters.
  • The company expects capital expenditure as a share of revenue to remain in the 4% to 6% range in fiscal 2027. Wells Fargo believes this is related to Western Digital’s higher capital spending over the next two years: the latter is adopting a design with more platters, while Seagate maintains a 10-platter-per-drive approach.
  • Wells Fargo expects Seagate to move to a net cash position by the end of the quarter ending in December and is therefore optimistic about future capital returns; the company had $4.4 billion remaining under its share repurchase authorization at the time.

Why was the price target cut despite higher earnings forecasts?

  • Wells Fargo raised its calendar 2027 revenue forecast from $19.1 billion to $23.3 billion and its earnings-per-share forecast from $25.20 to $51.69; its 2028 forecasts rose from $25.029 billion and $53.69 to $29.9 billion and $75.23, respectively.
  • The bank maintained its overweight rating but cut its price target from $865 to $820; the new target is approximately 11 times its calendar 2028 earnings-per-share forecast. It cited tight supply and demand, improving gross margins, free cash flow and capital returns as valuation supports.
  • In a downside scenario in which hard drive industry capacity shipments fall short of expectations and historical cyclicality raises concerns about pressure on gross margins, the bank’s scenario price target is $565. The report also highlights risks including fluctuations in cloud and hyperscale data center demand, competition and pricing pressure.