Seagate Technology PLC (STX): Cheap and High Yielding… But Is It Worth It?

Page 1 of 2

I’ve been on the hunt for bargains lately. A company that recently stood out was Seagate Technology PLC (NASDAQ:STX). At a very superficial first glance, the company looks like a bargain. It trades at a P/E of under 5, with a forward P/E of about 6.7. It yields over 4%, which is awesome. But is this company truly a bargain, or is it a value trap– lagging the market for a reason? Let’s take a deeper look.

A duopolistic storage king

The company’s cheap valuation and high yield are positives initially. Nothing like buying a cheap stock and collecting a great stream of income, while waiting for the market to realize they left behind a good company. The company also has a large share of most of the markets it operates in. It also dominates in these saturated markets for the most part, with Western Digital Corp. (NASDAQ:WDC) usually being its sole competition.

Seagate Technology PLC (NASDAQ:STX) controls around an estimated 40% share of the hard-disk drive market, with competitor Western Digital owning another 45%. Being second, but by a long-shot compared to those below you in a saturated market, can often be a strength — as barriers to entry are high. So why not consider Western Digital Corp. (NASDAQ:WDC)? Because yielding only 2%, Western Digital Corp. (NASDAQ:WDC) makes me like Seagate Technology PLC (NASDAQ:STX) and its 4% dividend yield twice as much.

Falling knife or double-edged sword?

Seagate seems to be a very cyclical company, and a recession may mean a quick and sudden drop in already seemingly sporadic and unpredictable earnings. A global recovery and a pick-up in enterprise could also mean really good prospects for earnings, however, so know that Seagate Technology PLC (NASDAQ:STX) may be a double-edged sword.

Another thing to watch closely if considering an investment in Seagate is its balance sheet — as debt looks to be much higher than many other tech companies.

Is there a cloud over the moat?

Cloud computing needs storage. As a major player in a duopolistic storage market, a pick-up in enterprise data-centers and cloud computing may be the drawbridge that allows Seagate to cross its more PC-related moat to discover more growth, as well as new markets.

Seagate may make a good play on increasing cloud-related data storage, more so even than current leaders in the public cloud space, such as Amazon.com, Inc. (NASDAQ:AMZN), Google Inc (NASDAQ:GOOG), and Microsoft Corporation (NASDAQ:MSFT). All three of these cloud giants seem to be engaged in a price war.

While Amazon web services (AWS) is expected to double revenue this year (which also works out to be around 5% of sales), there is a problem. Amazon already had minuscule margins of only around 1.11% for 2012, as compared to over 25% for Google and Microsoft Corporation (NASDAQ:MSFT).

Bloomberg author Ari Levy thinks this is good, explaining that “Amazon can cut prices on cloud services without “affecting its total profitability” because “Investors aren’t fazed by Amazon.com, Inc. (NASDAQ:AMZN)’s low margins.” As Amazon’s stock continues to defy gravity and remain richly valued, even with negative earnings, Levy may have a point.

This is why Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG), who are also increasingly beginning to battle over the enterprise apps markets (as Google is trying to eat some of Microsoft’s lucrative Office pie), may end up being dragged down and required to continue to lower their margins also — to compete with Amazon.com, Inc. (NASDAQ:AMZN).

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!