Here's Why You Should Dump Seagate Technology (STX) Stock

On Jul 19, Zacks Investment Research downgraded Seagate Technology plc. (NASDAQ:STX) to a Zacks Rank #5 (Strong Sell).

Earnings estimates for Seagate have been revised downward over the last 30 days for 2017 and 2018. Notably, the Zacks Consensus Estimate for 2017 remained unchanged at $4.46, while that for 2018 declined to $4.70 from $4.75 over the same time period. The downgrade can primarily be attributed to declining product demand, competitive market structure, sluggish macroeconomic environment and IT spending trends.

We believe Seagate’s significant investments in HAMR technology, 10 and 12 terabyte Helium HDD and fourth generation SMR technology will take some more time to translate into credible top-line growth.

Notably, Seagate’s shares have underperformed the S&P 500 on a year-to-date basis. While the index gained 10.1%, the stock returned 1.7%.

Intensifying Competition & Declining Demand Remain Headwinds

Seagate is experiencing a downturn primarily due to declining demand in the PC market as evident from Gartner and IDC’s recently released worldwide PC shipments data.

Shift in demand from PCs to inexpensive mobile devices is hurting the growth of hard disk drives (HDD) manufacturers like Seagate. Moreover, the merger of Western Digital (NASDAQ:WDC) and SanDisk has intensified competition in the storage industry, particularly in the solid state drive (SSD) market. This remains an overhang on the company.

The company is diversifying its product portfolio to outweigh the negative impact of diminishing HDD market, thereby lessening the risk of customer concentration. However, the products are at a very nascent stage to contribute positively to its top-line growth.

Seagate faces pricing pressure because of high volatility in the DRAM and NAND space, which led to the company maintaining low inventories in the current quarter.

Stocks to Consider

Better-ranked stocks in the broader sector include KLA-Tencor (NASDAQ:KLAC) , Veeva System (NYSE:VEEV) and Applied Optoelectronics (NASDAQ:AAOI) . All the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rates for KLA-Tencor, Veeva and Applied Optoelectronics are projected to be 21.24%, 19.64% and 18.75%, respectively.

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