Looking for Value in the Tech Sector? Read This
As the market cheers for another round of rallying in tech stocks, valuations in the sector appear to be getting more and more bloated. And that means if you are looking to get into tech stocks right now, bargains will be hard to find.
Think about it, the S&P 500 Index is up 7.2% since the beginning of this year, which is already impressive given the COVID-19-induced sell-off in March. The tech-laden Nasdaq Composite, on the other hand, soared an even more impressive 28.5% during the same period.
The result is that the most of the big-name tech stocks now look quite expensive.
To give you an idea, the average price-to-earnings ratio for companies in the NASDAQ 100 Index stands at 36.76 times at the time of this writing. A year-ago, the ratio was 23.55 times. (Source: “P/Es & Yields on Major Indexes,” The Wall Street Journal, last accessed August 28, 2020.)
And if you want to own the hottest names in the tech sector, prepare to pay high double-digit—in some cases, triple-digit—price-to-earnings multiples.
That’s why today, I want to talk to you about a “not-so-hot” tech stock. It offers more-than-decent prospects and appears to be more reasonably priced compared to most of its peers.
The company in question is Seagate Technology PLC (NASDAQ:STX), which has been around since 1978.
It focuses on providing data storage solutions, currently offering a wide range of products such as hard disk drives (HDDs), solid-state drives (SSDs), and solid-state hybrid drives (SSHDs). Most of Seagate’s products are sold directly to original equipment manufacturers (OEMs), with the rest sold through distributors and retailers.
One of the main catalysts for Seagate is the surging demand for mass capacity storage solutions.
You see, in the three months ended June 28, 2019, the average capacity per drive of Seagate’s data storage products was 2.7 terabytes. Just one year later, the company was shipping products with an average capacity of 4.5 terabytes. (Source: “Supplemental Financial Information,” Seagate Technology PLC, last accessed August 28, 2020.)
Looking further back, you’ll see that, over the past five years, the share of mass capacity revenue in the company’s total revenue went from 28% to 53%.
And that trend is expected to continue due to long-term secular demand for mass capacity storage from enterprise customers.
It is estimated that, by calendar year 2025, the total addressable market (TAM) for HDD mass capacity storage will reach approximately $24.0 billion, which would nearly double the segment’s trailing 12-month TAM of $12.5 billion. (Source: Ibid.)
Also, as it stands, Seagate Technology PLC is already running a growing business.
In the fourth quarter of Seagate’s fiscal year 2020, which ended July 3, the company generated $2.5 billion in revenue. This number represented a 6.2% increase year-over-year. (Source: “Seagate Technology Reports Fourth Quarter and Fiscal Year 2020 Financial Results,” Seagate Technology PLC, July 28, 2020.)
Notably, revenue from mass storage markets rose 35% year-over-year in the reporting quarter and accounted for 63% of Seagate’s HDD revenue.
The company’s adjusted earnings came in at $1.20 per share in the fourth fiscal quarter, up 26.3% from the $0.95 per share earned in the year-ago period.
And keep in mind that Seagate Technology PLC achieved those results despite the impact from COVID-19 disruptions to market demand and profitability.
Given the secular tailwind and the company’s strong financials, you might expect Seagate stock to be a hot commodity. But that’s not really the case.
Shares of STX stock had a choppy ride in recent months, and are actually trading at similar levels to what they did a year ago.
As a result, Seagate Technology PLC has a price-to-earnings ratio of around 12 times. Now, when was the last time you saw a solid tech stock with this kind of valuation?
Seagate Technology PLC (NASDAQ:STX) Stock Chart
Chart courtesy of StockCharts.com
Ultimately, there are tech companies with stronger growth potential than Seagate Technology PLC. But once you factor in valuations, you’ll see that STX stock could be quite the bargain in today’s market.