Seagate Technology PLC: Is It Time to Jump Ship on STX Stock?

Time to Bail on STX StockTime to Bail on STX Stock?

Are cost-saving measures going to be enough to resuscitate Seagate Technology PLC’s (NASDAQ:STX) stock price?

Slashing jobs might be a great way to cut back on spending in the near term, but if revenue continues to crater, the company is going to have to do something else to distract investors.

That’s in addition to having a frothy 8.6% annual dividend. Not even that is enough to weather the downward spiral the company’s share price has been caught in since late 2014. Between December 2014 and mid-May 2016, STX stock’s price tumbled approximately 70% to a four-year low of around $18.40 per share.

The Real Scoop on STX Stock

The STX stock price got kicked over the cliff in mid-April after it announced weak preliminary third-quarter results. The company’s stock suffered another blow when it actually reported results on April 29. Third-quarter revenue tanked 22% and the company swung to a third-quarter loss of $21.0 million. (Source: “Seagate Technology Reports Fiscal Third Quarter 2016 Financial Results,” Seagate Technology PLC, April 29, 2016.)

When you take into consideration that investors invest in a company based on what they think it’s going to do, you can see why they’re a little sheepish right now.

The data storage device company said that the personal computer market, which historically provides it with most of its revenue, contracted to a nine-year low in the first quarter of 2016. Frankly, the future, as it stands right now in the hallowed halls of Seagate, doesn’t look fantastic. Data storage at cloud data centers is being done more and more with drives made of semiconductors, which Seagate doesn’t offer.

On top of that, the market for hard disc drives (HDDs), which are used in personal computers, is facing stiff competition from faster, more efficient solid state drives (SSDs). Mobile devices, which use SSDs, are the primary driver of this growth. While Seagate manufactures both, its SSD market share is much smaller than those of its competitors.

The demand for personal computers is not exactly accelerating, either; it’s actually expected to report its fifth consecutive year of declines.

Job Cuts a Catalyst for STX Stock?

After disappointing investors for years, Seagate excited more than a few last week when it announced plans to cut about 6,500 jobs, or around 14% of its global workforce, by the end of June 2017. Investors rejoiced, sending the stock soaring nearly 22%. (Source: “Seagate Technology Announces Preliminary Financial Information For Fiscal Fourth Quarter And Year-End 2016,” Seagate Technology PLC, July 11, 2016.)

The job cuts are part of the company’s restructuring plan that will consolidate operations across Africa, the Americas, Asia, Europe, and the Middle East. The restructuring is expected to cost the company approximately $164 million in pre-tax charges during fiscal 2017.

The company also provided fourth-quarter and full-year guidance for its fiscal year (ended July 1, 2016). Fourth-quarter revenue is expected to come in at $2.65 billion, above previous guidance of $2.3 billion. The good news is that revenue is up! Well, yes and no. Revenue might be better than initially forecast, but it’s still down 8.5% from the $2.9 billion reported in the fourth quarter of fiscal 2015. (Source: “Seagate Technology Reports Fiscal Fourth Quarter And Fiscal Year 2015 Financial Results,” Seagate Technology PLC, July 31, 2015.)

This comes after the company announced plans to cut 1,600 jobs, or three percent of its workforce, on June 29. This restricting effort will be completed at the end of the September quarter and results in pre-tax charges of $62.0 million. The charges will be accounted for mainly in the company’s fourth-quarter results. (Source: “Seagate to cut 1,600 jobs in restructuring plan,” Reuters, June 29, 2016.)

The Bottom Line on STX Stock

Cutting jobs and cheering one quarter of better-than-expected revenue growth does not exactly spell “success” for STX stock. I’m not even sure it’s a great start. Overall demand for the company’s core products is waning, the company is facing strong headwinds from competition, it isn’t profitable, and it has more than $4.1 billion in long-term debt and just $1.2 billion in cash; however, it does have a dividend payout ratio of 125%.

Things are going to get worse before they get better for STX stock, but things aren’t all bad. While PC hard drives are not as much of a hot-ticket item as they once were, the company is getting more and more of its revenue from cloud/new storage applications. In 2010, 47% of its revenue came from the cloud; in 2015, 59% of revenue did. (Source: “Supplemental Financial Information,” Seagate Technology PLC, April 29, 2016.)

This is exactly what the company needs to do. The future is in mobile and the cloud (and other yet-to-be-announced technologies), not HDDs. However, I’m sure there are still some diehard 8-track lovers out there who disagree.