Seagate Technology Holdings PLC (STX.US) posted strong earnings, but valuation concerns persist; Goldman Sachs Group, Inc. and UBS Group AG cut their price targets, while JP Morgan maintains an "Overweight" rating.

AI data center buildouts continue to drive up demand for enterprise hard drives, lifting Seagate Technology Holdings PLC (STX.US) earnings and profitability further. However, even though the company's latest quarterly results beat market expectations, Wall Street remains sharply divided over whether the tight supply-demand balance in the HDD industry can persist and whether the related stocks' valuations are reasonable. Seagate's reported fiscal 2027 first-quarter results showed revenue for the quarter ended September rose 61% year over year to US$4.233 billion, with non-GAAP diluted earnings per share of US$7.68, both above market expectations. Data center business revenue rose 63% year over year to US$3.449 billion. Helped by strong product pricing, gross margin rose to 57.8% and operating margin reached 50.7%. Seagate expects fiscal 2027 second-quarter revenue of US$4.7 billion to US$4.9 billion, a midpoint of US$4.8 billion; non-GAAP diluted EPS is expected at US$9.00 to US$9.40, a midpoint of US$9.20, both above prior Wall Street consensus. JP Morgan noted that Seagate's average selling price per TB rose about 32% year over year last quarter, well above the 11% increase in the prior quarter, reflecting strong cloud customer demand amid persistent industry supply tightness. Meanwhile, Seagate's HDD storage capacity shipments rose about 21% year over year, a relatively modest increase, indicating that the company's current revenue growth is driven more by price increases. Seagate management expects storage capacity shipment growth to accelerate markedly in the second fiscal quarter as shipments of its next-generation Mozaic 4 products expand. The company also expects medium- to long-term storage capacity shipments to sustain annual growth of about 25%. On the demand side, AI inference and agentic applications are increasing data generation and storage needs. JP Morgan noted that the vast majority of Seagate's nearline HDD supply has been allocated through 2028, with supply agreements for some cloud customers extending to 2030, indicating that large technology companies are locking in storage resources years in advance. The next-generation HAMR technology is another key to Seagate raising capacity and profitability. Seagate is expanding Mozaic 4 drive supply to two large cloud service providers and plans to complete product qualification with more customers in the coming months. The product uses heat-assisted magnetic recording (HAMR) technology, which can increase per-drive storage capacity without significantly increasing the number of drives produced. Goldman Sachs Group, Inc. believes Seagate's performance was solid, but with investor expectations already high, the latest report may not be enough to drive the stock further. The bank noted that Seagate's first-quarter revenue and earnings slightly beat market expectations, while second-quarter guidance clearly exceeded expectations. However, after Western Digital Corporation previously reported strong results, market expectations for Seagate had already risen markedly, so even with a solid report card, the stock could still face near-term pressure. Still, Goldman Sachs Group, Inc. remains bullish on Seagate's earnings growth prospects. The bank believes the current tight supply-demand balance in the HDD industry, combined with a rising mix of high-capacity products, will continue to support product pricing and margin expansion. Seagate's first-quarter storage capacity shipments rose about 21% year over year, but price per unit of storage capacity rose about 33% year over year. Management expects this strong pricing trend to continue in fiscal 2027 and projects sequential revenue and margin improvement in coming quarters. Goldman Sachs Group, Inc. is especially bullish on the earnings contribution from the HAMR technology upgrade. As Mozaic 4 products begin volume shipments to two hyperscale cloud service providers and customer qualification gradually expands, Seagate is expected to further increase the share of high-capacity HDD shipments. Goldman Sachs Group, Inc. expects HAMR-based products to account for about 70% of Seagate's shipments by 2027, driving above-industry-average earnings growth. At the same time, Goldman Sachs Group, Inc. also reminded investors to watch potential industry supply expansion risks. The bank noted that Toshiba may significantly increase HDD capacity, challenging the currently tight supply-demand setup. Although Seagate management believes competitor capacity expansion is unlikely to materially disrupt industry supply-demand balance, Goldman Sachs Group, Inc. believes this potential change could still cap HDD companies' valuation multiples. Based on stronger revenue and gross margin prospects, Goldman Sachs Group, Inc. raised its Seagate earnings forecasts by an average of about 11% and maintained its "Buy" rating. However, given lower peer valuation multiples, the bank cut its 12-month price target for Seagate to US$900 from US$960, and lowered its target P/E to 20x from 24x. By contrast, JP Morgan is more optimistic about the HDD industry's medium- to long-term outlook. JP Morgan maintained its "Overweight" rating and US$1,050 price target on Seagate and raised earnings forecasts for the next two fiscal years. The bank believes continued AI infrastructure expansion by cloud giants, combined with relatively restrained capacity expansion in the HDD industry, will continue to support product prices and corporate earnings. The bank noted that the vast majority of Seagate's nearline HDD supply has been allocated through 2028, with supply agreements for some cloud customers extending to 2030. As AI inference and agentic applications continue to increase data storage demand, the industry supply-demand gap may widen further. The bank expects the HAMR technology upgrade and improved product pricing to jointly drive continued margin expansion at Seagate. UBS Group AG maintained its "Neutral" rating on Seagate and cut its price target to US$750 from US$780. The bank believes that although HDD demand currently clearly exceeds supply, the market may be overemphasizing the benefits of short-term supply tightness. As major manufacturers push ahead with HAMR technology upgrades, overall industry storage capacity supply could still accelerate in the future. UBS Group AG also noted that potential capacity expansion by Toshiba could change the current competitive landscape, and HDD companies' valuations should not remain above those of DRAM memory chip companies over the long term. Therefore, although Seagate's earnings outlook remains strong, the bank expects the stock's valuation multiple to face downward pressure. Overall, Seagate's latest results further confirm that AI infrastructure investment is continuing to flow through to data storage. However, while rising HDD prices, HAMR technology upgrades and long-term supply agreements support earnings growth, the industry's future new capacity and valuation levels are also becoming the focus of Wall Street debate.