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

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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!