3 Reasons to Sell STX and 1 Stock to Buy Instead

Seagate Technology has been on fire lately. In the past six months alone, the company’s stock price has rocketed 151%, reaching $220.33 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in Seagate Technology, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Seagate Technology Not Exciting?

Despite the momentum, we're swiping left on Seagate Technology for now. Here are three reasons there are better opportunities than STX and a stock we'd rather own.

1. Revenue Spiraling Downwards

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Seagate Technology’s demand was weak and its revenue declined by 2.8% per year. This wasn’t a great result and is a sign of lacking business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Low Gross Margin Reveals Weak Structural Profitability

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Seagate Technology’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 30.4% gross margin over the last two years. That means Seagate Technology paid its suppliers a lot of money ($69.59 for every $100 in revenue) to run its business.

3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Seagate Technology has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 9.5%, subpar for a semiconductor business.

Final Judgment

Seagate Technology isn’t a terrible business, but it doesn’t pass our quality test. Following the recent rally, the stock trades at 22.4× forward P/E (or $220.33 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better investments elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.

Stocks We Would Buy Instead of Seagate Technology

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