Seagate’s Earnings Warning Foreshadows Severe Downcycle in FY23, but we Foresee a Rebound Thereafter

We lower our fair value estimate for no-moat Seagate Technology to $70 per share, from $75 previously, in response to a negative announcement for fiscal first-quarter results. Seagate's previous forecast called for a weak September quarter resulting from weak demand and inventory unwinding in its legacy hard disk drive markets that caused us to lower our estimates and valuation. This latest announcement comes as management sees demand softness spreading into Seagate's vital cloud market into which it sells mass capacity drives. We now expect even weaker results throughout fiscal 2023 as soft demand affects sales and underutilization at Seagate's facilities hampers margins. Nevertheless, we continue to view a weak fiscal 2023 as a cyclical downturn, and remind investors that Seagate's vulnerability to cyclicality underpins our no-moat rating. Long-term, we continue to see positive demand drivers for mass capacity drives into the cloud, and expect a rebound for Seagate after fiscal 2023. We rate shares as fairly valued.