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Seagate Technology (NASDAQ: STX) Learning to Adapt to Mobile Devices while Maintaining Strong Position in HDD and Storage Solutions

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The rise of the tablet and other mobile devices has been well documented and brought with it countless predictions concerning the imminent demise of the notebook, laptop, and PC along with the companies that concentrate their business on manufacturing the hardware that goes inside these products. Among those companies designated for the scrapheap is Seagate Technology (NASDAQ: STX) which makes hard drives and storage solutions for the aforementioned and soon to be obsolete PC but the question remains, is the death of the PC greatly over exaggerated and if so is there really cause for concern for a company like STX?

Arguments that the PC is slipping are generally formed by American thought, a thought process that often negates the realities that exist for the rest of the world. As it stands, PC demand is actually increasing worldwide, with a 10.3% year-over-year growth in the third quarter. As one of the largest manufacturers of hard disk drives for PCs and many servers, they compete closely with Western Digital (NASDAQ: WDC), Seagate would appear to be in an enviable position in terms of demand for their main product.

On top of this, Seagate focuses much of its attention on drives that are used for enterprise storage and is not completely dependent upon the consumer market. This is significant in the fact that their HDDs (hard disk drives), at present, deliver a lot more benefits than the SSDs (solid-state drives) that are supposedly ready to take over the market. The reality is HDDs offer a much better price per gigabyte of storage than SSDs could for enterprise use including Web servers, network storage, network communications, and digital surveillance, and because information will always need to be stored the HDD looks to have a solid shot at remaining relevant.

Shareholders of STX can find added relief in market analyst iSuppli’s prediction that more than 169 million units of HDD shipments will have been made in this quarter, the second straight growth period. Making things even better is that increase is not just from enterprise and external storage but from increased desktop orders, something pointed out earlier.

What’s difficult to figure out is why investors are so quick to dismiss Seagate Technology. Right now shares are trading around the 14.24 -14.28 range, below the 50-day moving average of 14.57 and 200-day moving average of 14.41. Analysts have predicted little growth for STX and have estimated an EPS of 0.33 in their most recent quarter, significantly lower than the 1.05 they posted a year ago. Of course the answer will come on January 19 when STX announces their fiscal second quarter 2011 financial results after the market closes.

Looking at their balance sheet you may see some red flags; a $2.17 billion total debt, revenue growth average over 5 years at 7.2%, and net income margin average over 5 years at 1.2%; but it’s hard to ignore the 21.1% revenue growth TTM and the $2.07 billion cash in their most recent quarter. Of course if you look at WDC they too have a solid financial outlook with $2.86 billion cash in their most recent quarter, strong revenue growth and a substantially lower debt at $380 million.

So what makes STX relevant if WDC is putting up better numbers? The answer to this may come in those mobile devices that are supposed to destroy the traditional powers. STX hasn’t turned its back on those mobile devices but rather they have developed their removable GoFlex consumer external hard drives to be compatible with such devices, opening up a significant market. STX recently announced a new program to allow third-party companies to incorporate slots on their products to support these external hard drives. According to the company this will “provide a seamless method by which people can copy, record, access, share and enjoy more of the music, photos and videos they crave on a wider range of devices.”

What these third-party products offer is the ability to “help transform the GoFlex ultra-portable drives from an external storage device to an easy-to-use, detachable storage module that will enable consumers to access digital content from a variety of consumer electronic devices.”

This could be a major win for Seagate as Parks Associates vice president and principal analyst Kurt Scherf has pointed out “Seagate Technology’s emphasis on targeting consumer electronics such as digital video recorders, gaming devices, digital music players, and digital cameras has allowed it to expand sales of hard drives and provide consumers with greater flexibility when it comes to consuming, sharing, saving and enjoying their content.”

On to the tablet, Seagate is making headway in this arena as they recently introduced a new collection of GoFlex for Mac external drives that makes it easy for those who use Mac OS X and Time Machine to backup, shuttle, or share digital content; and they can work across both Windows and Mac OS X computers. The GoFlex for Mac drive can be used with other devices in the GoFlex Storage System, making it possible to view content on mobile devices like Apple’s iPad or smartphones.

CEO Steve Luczo spoke about the iPad tablet in more direct terms saying STX was busy developing external devices that can connect to Apple Inc.’s iPad and other tablet devices to deliver music, video and other content; all content that attracts storage opportunities for STX.

Apple attracts a digit-rich consumer and those consumers will need external storage backup for that digital content, something Darcy Clarkson, vice president of Global Retail Sales and Marketing for Seagate, said STX is now offering, a “commitment to delivering flexible, easy-to-use solutions that meet varying customer needs.”

What this could mean for STX is a continued advance in the SSD market as well as the manufacturing of hybrids of SSD and HDD, enabling them further penetration in the rising tide of tablets; essentially giving them growth in the mobile device market while maintaining their strong presence in the world of the PC.

Perhaps this is why the company recently rejected a private equity takeover from TGP Capital that was said to be more than $7.5 billion. Knowing that STX opted to remain public should attract some investors who have taken notice that the stock is selling for a minimal four times last year’s earnings. Because the outlook has been so dim for HDD companies STX could be a great play as they have been busy positioning themselves for the changing times.

Before you chalk Seagate Technology up as a casualty of the tablet and mobile device invasion it might be a good idea to see what STX is doing. Recognizing that they are willing to embrace the new wave and provide consumer solutions while maintaining their enterprise solutions based on HDD products may give you an advantage that others opt to ignore.

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