Seagate Earnings: Poor Profits, Layoffs, and a Legal Settlement Combine for a Disappointing Quarter

We lower our fair value estimate for Seagate Technology to $55 per share, from $62, after it missed our fiscal third-quarter earnings expectations and provided poor forward-looking commentary. The ongoing downturn in the hard disk drive, or HDD, market is enduring longer than management anticipated. Though we viewed management’s longer-term recovery expectations as overly rosy previously, the quarter was disappointing. We have pushed out our expectations for an HDD recovery, lowered our short-term forecasts, and we have growing concerns over the firm’s balance sheet. After a promising print for the December quarter, the languid March quarter exhibits the volatility of the HDD market that leads to our no-moat rating for Seagate. A new round of layoffs and a trade violation settlement further soured the print. Shares traded down after results, and we see them as slightly overvalued.