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Seagate (NASDAQ: STX ) is in a tough spot in the market right now. The technology market is shifting away from Seagate's main product: hard-disk drives (HDD). Competitor Western Digital (NASDAQ: WDC ) has already addressed the market's shift, leaving STX stock to stagnate alongside aging technology.
The company will step up to release quarterly earnings this Monday. Wall Street will be watching closely to see if Seagate has some kind of a plan to addresses its core business issues.
The crux of Seagate's problem lies with the increasing popularity of solid-state drives (SSD). Old-school HDDs are mechanical and store information on a spinning platter. They consume quite a bit of energy and are the main choke point (in terms of speed) in many computers. SSDs, however, are based on flash memory. They have no moving parts and are considerably more power efficient.
Seeing the shift in the market, Western Digital bought flash and NAND memory maker SanDisk in 2016. To this date, Seagate has yet to truly address this shift in the storage market. As a result, about 90% of Seagate's sales come from HDDs, with SSDs making up the remaining 10% of revenue.
The one thing that has saved Seagate and STX stock is the rise of cloud computing. Due to the desire for low margins and the risk of overhead costs, cloud computing companies have long favored the considerable storage size and low cost of HDDs. That said, enterprise demand from cloud computing companies has only managed to offset declining consumer demand for HDDs for Seagate.
As a result, many analysts have issued "hold" ratings on STX stock. In fact, according to Thomson/First Call, STX has attracted 19 "holds" out of a total of 27 ratings. The consensus price target of $57.24 also indicates flat expectations from the brokerage community with STX closing at $56.44 yesterday.
Turning to earnings, Wall Street is forecasting solid year-over-year growth for Seagate. Fourth-quarter expectations come in at earnings of $1.45-per-share, up considerably from 65-cents-per share in the same quarter last year. Revenue is seen falling 16.5% to $2.80 billion.
EarningsWhisper.com puts Seagate's fourth-quarter whisper number at $1.50-per-share.
Technically speaking, STX stock has gone nowhere for months. The shares have been trapped between support at $55 and resistance near $60. Aside from a few attempted breakouts to both the upside and downside, STX has been locked in a $5 trading range.
Options traders, however, are anticipating a bearish breakdown for STX stock. Currently, the August put/call open interest ratio comes in at 1.62, with puts firmly in command. A closer look indicates that the August $50 and $55 put strikes are the most popular, with more than 5,000 contracts open at each.
Overall, August implieds are pricing in a potential post-earnings move of about 9.75%. This places the upper bound at $62, while the lower bound lies at $51. Both extremes lie well outside STX stock's support/resistance levels, meaning we could see an end to the stock's sidling price action as soon as next week.
Two Trades for STX Stock
Put Spread: Right now, Seagate has no real solution to the rise in popularity of SSDs. What's more, enterprise demand for HDDs is only offsetting the decline in consumer demand. Seagate is in a no win situation without a bigger push into the SSD market. As such, it may not matter if the company meets or beats quarterly expectations if guidance does nothing to address the SSD issue.
Those traders looking to bet on a downside breakout for STX might consider an Aug $54.50/$55 bear put spread. At last check, this spread was offered at 10 cents, or $10-per-pair-of-contracts. Breakeven lies at $54.90, while a maximum profit of 40 cents, or $40-per-pair-of-contracts, is possible if STX closes at or below $54.50 when August options expire.
Call Spread: On the other hand, if Seagate can offer some form of path forward or positive guidance despite its lack of SSD offerings, there is plenty of cash on the sidelines that could send the shares higher.
Traders looking to bet bullish on STX stock might want to consider an Aug $59.50/$60 bull call spread. At last check, this spread was offered at 16 cents, or $16-per-pair-of-contracts. Breakeven lies at $59.66, while a maximum profit of 34 cents, or $34-per-pair-of-contracts, is possible if STX stock closes at or above $60 when August options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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