When I last wrote on Seagate (Nasdaq:STX), I said that the huge uncertainties surrounding the hard disk drive market were going to make this an interesting, albeit unpredictable, stock. For most of the last quarter, though, the stock has chopped between $26 and $28 as the bulls and bears battle it out over how quickly hard drive prices will normalize and what normal even means anymore.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Another Surprisingly Good Quarter
Although Seagate's top-line outperformance was relatively light; the company's margins trounced expectations and fueled a much better per-share number.

Revenue rose 65% from last year and 39% from the prior quarter on a 25%/29% increase in units shipped. Significantly, it looks like there is many expected PC sales on the way as enterprise market growth (storage, mainly) was flat year-on-year (but up 15% sequentially). ASPs were also quite good - rising 33% from the year-ago level and dropping just 1% sequentially.

Margins were the real highlight. Gross margin improved by more than five points sequentially and nearly 18 points from last year. While Seagate continues to spend on R&D, core SG&A expenses seemed to drop as well.

SEE: Understanding The Income Statement

The ASP Mystery
The big driver for Seagate over the next few quarters is going to be how quickly hard drive prices normalize as production levels come back after the serious Thai flooding. While ASPs hovered around the $50s prior to the flooding, they spiked as high as $150 afterward. Now they're settling back down, but still seem to be in the mid-$70s.

The question I have is whether consolidation that started before the flooding is going to create any sort of "new normal." Western Digital (NYSE:WDC) bought Hitachi's business and Seagate bought Samsung's, further concentrating the market. It would seem that as the market gets closer to a duopoly, mutually destructive price-based competition would be counter-intuitive.

That said, there are other realities influencing pricing. If HDD pricing doesn't fall, will big buyers like Hewlett Packard (NYSE:HPQ), Dell (Nasdaq:DELL) or Lenovo see even more of a shift to solid state drives (SSD)? After all, NAND pricing keeps dropping and companies like Micron (Nasdaq:MU) and Intel (Nasdaq:INTC) have repeatedly said that they're seeing more and more interest in SSDs and adopting them.

SEE: Earning Forecasts: A Primer

The Bottom Line
Even if alternatives like PC/notebook SSDs, smartphones and tablets challenge the computer business, enterprise demand is likely to continue to increase as EMC (NYSE:EMC) and NetApp (Nasdaq:NTAP) keep shipping storage systems to support Big Data.

That said, it looks like the question of obsolescence for HDDs is a when, not if, question. That makes Seagate a very tricky stock to value today. I suspect that while Seagate will see a spike in near-term free cash flow, the next decade is going to see significant erosion.

The market already seems to be pricing in a steep cliff in Seagate free cash flow, and a longer period of firm ASPs and/or increased efficiency (better margins) could stretch out that time to the edge of the cliff. That being the case, this could still be a very interesting stock to own for 2012, but I don't think it would work out well as a long-term holding.

SEE: 5 Must-Have Metrics For Value Investors

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  6. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  7. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  8. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  9. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  10. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!