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Can Seagate Technology PLC (STX) and Western Digital Corp (WDC) Survive Grim Outlook?

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It has been a rough year for Seagate Technology PLC ( STX ) and Western Digital Corp ( WDC ) investors, with the stocks down 65% and 60%, respectively, over the last 12 months.

Unloved Stocks to Buy: Seagate Technology PLC (STX)

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While 2016 has been a clear-cut disaster for STX and WDC, there are some investors who have begun looking at the valuations and dividends associated with these stocks, and initiating long positions prior to last week's crash.

Unfortunately, any bull thesis that had been forming went out the window after both Seagate and Western Digital's fiscal third quarters showcased major market weakness, and margin pressure on each business.

With that said, neither Seagate nor Western Digital have been good investments for a long time, but is it possible that those bad fortunes will change? Or, is the worst yet to come?

What You Need to Know About STX and WDC

Both STX and WDC have made major strides to lessen their dependence on the sales performance of PCs and laptops, but rest assured that both companies are still largely connected to the PC space.

Since the mid-2000s, the hard disk drive leaders have seen their PC-related applications fall from 90% of total revenue to about 50% in the last year or so. Still, 50% of revenue tied to PCs makes both companies highly vulnerable to whatever the industry may face. This fact is the most important thing investors must keep in mind before investing in either Seagate or Western Digital.

Here's the thing: Analysts have been predicting an end to the PC sales decline for the last three years!

These research firms naturally assumed that PC sales would recover as tablet sales ran their course. That has not happened, and during the first quarter, worldwide PC shipments fell to their lowest level since 2007 with an 11.5% decline .

So, is it logical to suggest that PC sales will all of a sudden recover from this point? I don't believe so. The fact is that the world is becoming even more mobile, and with Chromebooks and more capable tablets, PCs have become a VCR, or a CD player.

This does not bode well for either STX or WDC. Yes, Seagate and Western Digital are trading at about 8x next year's expected EPS. However, as evident during the most recent quarter, expectations are too high, and now margins are starting to fall faster than the market anticipated.

Bottom Line for Seagate and Western Digital

On top of these obvious PC-related issues, both Seagate and Western Digital's biggest market opportunity is to provide storage solutions in the cloud. This was seen as a major catalyst five years ago, a long-term growth driver. However, storage in the cloud is now essentially free, and what seemed like a golden investment opportunity a few years ago, has become an increasing weight on margins.

As a result, research firms Baird, Barclays, Cowen, Deutsche Bank and Needham all lowered their price targets on WDC over the last week. And that big 12% dividend that so many retail investors like about STX? JP Morgan thinks it is unstable based on the company's earnings and outlook.

While analysts are not always right, it's rare that they are universally wrong. With STX and WDC still down and beaten so badly, yet still receiving downgrades and lower price targets, it speaks volume about the prospects for both stocks and companies.

As of this writing, Brian Nichols did not own a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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