Shares of Seagate Technology (STX - Get Report) are sliding after the company issued a revenue warning for the third quarter. Several analysts, including at ones at Deutsche Bank, Citi and UBS, predicted that its results would disappoint ahead of the pre-announcement, citing HDD weakness. The Fly published summaries of those notes on the days they were disseminated.
WHAT HAPPENED: After the market close yesterday, Seagate cut its Q3 revenue view to approximately $2.6B from approximately $2.7B, and lowered its non-GAAP gross margin forecast to approximately 23% from approximately 25.6%. The company attributed the weaker third quarter guidance to reduced demand for traditional mission critical hard disk drive enterprise products, reduced demand for the company's systems and silicon products, reduced demand for desktop client products primarily in China, and the company's decision to not aggressively participate in the low capacity notebook market.
BEARISH FORECASTS: Yesterday morning, Deutsche Bank analyst Sherri Scribner downgraded Seagate to Hold from Buy. Although the analyst believes the company is well positioned for longer term positive HDD industry trends, Scribner said she expected near-term HDD sales declines to limit earnings per share upside. The HDD industry is transitioning from a unit-driven industry to a capacity-driven market, which creates near-term challenges, with the market to remain challenged through 2020, Scribner told investors yesterday. Scribner said she viewed the stock as fairly valued at then-current levels. On January 27, Citi analyst Stanley Kovler started Seagate with a Sell rating, saying that actions the company has taken to cope with the decline of the sector "may only help so much." Kovler said he believes the sector has begun a decline that should last for quite some time. On September 10, UBS analyst John Roy also started the company's stock with a Sell rating. Cloud and enterprise will continue to buy HDDs, but growth will shift to new solid-state devices over time, the analyst predicted, adding that he expected Seagate to struggle with the transition and likely face secular declines.
REACTION: Following Seagate's negative pre-announcement, UBS' Roy lowered his price on the shares to $22 from $24, saying the second miss in three quarters highlights HDD weakness. Investors had been expecting 2016 to be weak, but 2017 estimates are now starting to get impacted, the analyst told investors. Roy also said the read-across from Seagate's report is negative for enterprise HDD storage, particularly for NetApp (NTAP - Get Report) , which is most exposed. EMC's (EMC) fundamentals could "be hit some" and weakness in the enterprise could slow Nimble Storage's (NMBL) progress in that "new-for-them" market, Roy added. Brean Capital analyst Ananda Baruah also lowered his price target on the shares to $50 from $65, but remains a buyer of Seagate. The analyst was positive on its longer term outlook, as he believes the company will be compelled to address its cost structure after seeing how the softer PC business has impacted gross margins. Seagate's dividend yield provides a cushion, Baruah told investors.
PRICE ACTION: In afternoon trading, Seagate's shares are down more than 19% to $27.39. Since UBS' sell call on September 10, the stock has fallen about 45%.
Reporting by Jessica de Sa-Mota.