Seagate (STX) Q2 Earnings: What Lies Ahead for the Stock?

Seagate Technology PlcSTX is set to report second-quarter fiscal 2018 earnings results on Jan 29. Last quarter, the company delivered a positive earnings surprise of 11.6%. Moreover, we note that Seagate has outperformed the Zacks Consensus Estimate for earnings in three of trailing four quarters, with an average beat of 2.5%.

Seagate is gaining from the increasing adoption of its Nearline HDDs. We believe that Nearline's rapid adoption will boost Seagate's competitive position against Western Digital WDC . The company's efforts in the improvement of areal density with the ramping up of its heat assisted magnetic recording (HAMR) technology are yet another positive.

Let's see how things are shaping up prior to this announcement.

Expect What?

The Zacks Consensus Estimate for the quarter is pegged at $1.40 per share, reflecting a year-over-year decrease of 1.5%. Further, earnings estimates have moved north over the last 30 days. However, Zacks Consensus Estimate for revenues is pegged at $2.83 billion, down roughly 2.2% from the year-ago quarter.

Aspects to Influence Q2 Results

Q1 Earnings Highlight

Seagate reported first-quarter 2018 non-GAAP earnings per share of 96 cents, surpassing the Zacks Consensus Estimate of 86 cents per share.

Revenues of $2.63 billion also topped the Zacks Consensus Estimate of $2.56 billion but decreased 5.9% from the year-ago quarter. Nevertheless, both the top and bottom-line figures witnessed a sequential improvement, primarily attributable to strong demand and adoption of Seagate's storage drives.

Notably, its shares have gained 69.5% in the last six months, while the industry recorded growth of 22.3%.

Positive Preliminary Q2 Results

The stock gained from the positive second-quarter fiscal 2018 preliminary results.

Seagate now expects revenues to be approximately $2.9 billion compared with an increase of 3-5% guided previously. The improvement can primarily be attributed to strong growth in exabyte demand.

The company expects exabyte shipments to be roughly 88 exabytes, which reflects drive shipments to be around 40 million and average capacity per drive to be approximately 2.2 terabytes.

Moreover, the company recently announced a long-term supply agreement with Toshiba, which ensures continuous supply of NAND chips for Seagate's expanding solid-state drive (SSD) portfolio.

Improving HDD Demand

HDD (hard disk drives) is improving primarily due to strong demand for high-capacity mass-storage solutions. Increasing adoption of Seagate's Nearline HDDs is likely to impact the to-be-reported quarter positively.

Further, Seagate's effort to augment areal density with the ramp up of its HAMR technology is a key catalyst.

Strong PC Shipments Drives Growth

Hints of PC market stabilization as reflected in the latest reports from Gartner and IDC are a positive. Notably, stabilization of the PC market per the latest report from Gartner and IDC bodes well for memory shipments, particularly HDDs. According to IDC, worldwide PC shipment has shown signs of growth in the fourth quarter of 2017, during which shipments touched 70.6 million units, up 0.7% year over year.

These factors are likely to positively impact the to-be-reported quarter.

What the Zacks Model Unveils?

Zacks ESP: Seagate currently has an Earnings ESP of 0.0%. This is because both the Most Accurate estimate and Zacks Consensus Estimate are pegged at $1.40 per share. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

Zacks Rank: Seagatecurrently carries a Zacks Rank #2 (Buy). While this increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise.

It should be noted that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks With Favorable Combination

Here are a couple of companies which, as per our model, have the right combination of elements to post an earnings beat this quarter:

Lockheed Martin Corporation LMT , with an Earnings ESP of +0.31% and a Zacks Rank of 2. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

SAP SE SAP , with an Earnings ESP of +7.58% and a Zacks Rank of 3 (Hold).

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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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