Will Cloud and AI Growth Help Seagate Preserve Its Margin Momentum?

Seagate Technology Holdings plc STX is riding a wave of surging demand from cloud, artificial intelligence (AI) and edge computing. The company’s nearline hard drives remain the backbone of hyperscale cloud storage, with build-to-order (BTO) contracts ensuring visibility well into mid-2026. This contractual model not only secures revenue streams but also provides cloud service providers (CSPs) with predictable supply assurance, an increasingly critical factor as global data center capacity is expected to more than double by 2029 on a gigawatt basis.

Fueled by robust nearline cloud demand and strengthening enterprise sales, Seagate’s mass-capacity revenues surged 40% year over year to $2 billion in the fourth quarter. Nearline drives accounted for 91% of all mass-capacity exabytes shipped, underscoring the pivotal role of these products in hyperscale and AI-ready data centers. CSPs are scaling infrastructure to support AI applications, which require massive, cost-efficient data storage solutions. HDDs remain a key enabler here, offering the balance of density, performance, energy efficiency and affordability that large-scale AI workloads demand.

Moreover, the adoption of Heat-Assisted Magnetic Recording (HAMR) and the launch of the Mozaic 3+ platform bode well. By increasing areal density, HAMR drives improve storage economics, allowing Seagate to offer higher-capacity products with better profitability. With 24–28TB PMR drives already among its top sellers and HAMR-based products likely to increase through 2026, the company is poised to maintain gross margins above historical averages. Management expects HAMR adoption to accelerate in the second half of 2026, with crossover in exabyte shipments marking a new phase of growth and profitability.

These factors have translated into impressive margin performance. Seagate closed fiscal 2025 on a strong note, with fourth-quarter revenues up 30% year over year and gross margins reaching a record high for the ninth straight quarter.

In the fiscal fourth quarter, non-GAAP gross margin climbed to 37.9%, expanding 170 basis points (bps) sequentially and nearly 700 bps year over year. The improvement was fueled by robust demand for high-capacity nearline drives, strong pricing discipline and greater adoption of HAMR technology. A favorable product mix and continued pricing improvements kept non-GAAP hard drive gross margins well above the company average. Non-GAAP operating income nearly doubled to $640 million from $327 million a year earlier, driving an 890-bp increase in operating margin to 26.2%.

Looking ahead, Seagate expects the positive trend to continue. For the first quarter of fiscal 2026, management projects revenues of about $2.5 billion (± $150 million), representing 15% year-over-year growth at the midpoint. Non-GAAP earnings are forecast at $2.30 per share (± 20 cents), with the non-GAAP operating margin projected to expand into the mid-to-high 20% range of revenues.

Seagate Technology Holdings PLC Price and Consensus

Seagate Technology Holdings PLC price-consensus-chart | Seagate Technology Holdings PLC Quote

However, Seagate faces tough competition from other players in the data storage industry, including HDD and SSD manufacturers, such as Western Digital Corporation WDC and Pure Storage, Inc. PSTG. In addition to stiff competition, the ongoing global macroeconomic troubles and volatile supply-chain dynamics are likely to remain concerns.

A Look at Margin Performance of WDC & PSTG

Western Digital has delivered a strong rebound in profitability, driven by higher cloud demand, disciplined cost controls and a strategic pivot to become a pure-play HDD company after spinning off its flash business. The shift toward high-capacity drives such as 26TB CMR and 32TB UltraSMR, alongside strong nearline adoption, has significantly boosted margins. In the fiscal fourth quarter, non-GAAP gross margin was 41.3%, up 610 bps year over year and above guidance, supported by cost efficiencies and manufacturing discipline. For the first quarter of fiscal 2026, management expects a non-GAAP gross margin of 41–42%, with revenues near $2.7 billion and earnings of $1.54 (+/- $0.15).

Pure Storage, a leading all-flash storage provider, is benefiting from rising demand for AI and virtualization workloads as well as strong hyperscale partnerships. The rollout of FlashBlade//EXA and wider adoption of the //E family, tailored for AI and HPC, are driving growth. In the first quarter of fiscal 2025, non-GAAP gross margin was 70.9%, slightly down from 73.9% last year, while operating income declined to $82.7 million from $100.4 million. For the second quarter, management guides revenues of $845 million (up 10.6% year over year), non-GAAP operating income of $125 million and an operating margin of 14.8%.

STX Price Performance, Valuation and Estimates

In the past year, shares have gained 66.4% compared with the Zacks Computer Integrated Systems industry’s growth of 20.2%.

In terms of forward price/earnings, STX’s shares are trading at 17.01X, lower than the industry’s 19.97X.

The Zacks Consensus Estimate for STX’s earnings for fiscal 2026 has been revised up 4.2% to $10.30 over the past 60 days.

Currently, Seagate sports a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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