Citigroup Says Buy These 2 Storage Stocks Amid Cyclical Demand Recovery

There’s a shift taking place in the digital storage space. After experiencing a surge in demand due to the pandemic, which was subsequently followed by a sharp downturn caused by prolonged COVID lockdowns in China, a war in Eastern Europe, and broader macroeconomic slowdowns that dampened cloud computing demand, collectively, the HDD and SSD sectors are now poised for a cyclical recovery.

That is the conclusion reached by Citigroup’s Asiya Merchant, who has been assessing the digital storage sector’s prospects. “Following several quarters of storage digestion, capex cuts and workforce reductions, we expect the storage media industry dynamics to improve from here with the return of pent-up storage demand led by hyperscalers,” the 5-star analyst said. “Total revenues for the storage media industry are poised to grow by ~25% CAGR over the next 3 years, largely driven by total PB growth of ~30% CAGR. Enterprise data is expected to continue to grow at 40%+ CAGR as AI becomes an incremental driver for data creation, storage, and data management.”

Against this backdrop, let’s follow Merchant’s argument in detail and examine two storage stocks in particular that she’s recommending to play this shift in demand. A look at the Street’s broader perspective on them, through the TipRanks platform, will also provide us with additional color. Here are the details.

Western Digital (WDC)

The first company we’ll look at here is Western Digital. The San Jose, California-based firm boasts a market cap of nearly $25 billion, and specializes in memory storage. Its product lines include PC hard drives, SSDs, memory cards, USB flash drives, and data center memory systems. In addition, the company owns the popular SanDisk brand, which is well known for its portable memory products.

Western Digital’s products are found in a wide range of applications, including SSD hard drive replacements, embedded flash memory, high-capacity HDDs and platforms for data centers, storage for smart video surveillance systems, and memory for high-end gaming upgrades. The company offers memory solutions for every need, from small thumb drives to multi-terabyte backup memories and storage.

Of particular interest to today’s investor, Western Digital’s memory products have found application in cloud computing and AI systems. These technologies lean heavily on high-speed computing – but also on increasingly large storage capacity.

On the business side, Western Digital recently reported its financial results from the fiscal third quarter of 2024. The company brought in a total of $3.46 billion at the top line, a figure that was up more than 23% year-over-year and beat the forecast by $110 million. The company realized a bottom line of 63 cents per share by non-GAAP measures, an impressive 48 cents per share better than had been anticipated. The company’s results were driven by a 45% year-over-year increase in the Cloud Revenue segment. We can note here that WDC stock has gained 44.5% year-to-date, outstripping the NASDAQ’s 13% returns by a substantial margin.

In another recent announcement that investors should watch closely, Western Digital in March gave an update on its plans to split into two independent public companies. The split will form a separation between the HDD and Flash businesses and is on track to take place during the second half of 2024. Management expects that the split will put each segment in a better position to focus on its own attributes and assets – and to thereby unlock advantages for investors.

For Citigroup’s Merchant, who is ranked among the Street’s top 5% of analysts by TipRanks, the return of growth in the storage market is reason for optimism here: “We initiate Western Digital shares with a Buy rating given our view of a cyclical recovery in the storage market which coupled with our view of AI driven storage demand growth and rational capacity additions should enable the company to sustain higher revenue and earnings growth ahead.”

The analyst goes on to look at the synergies of the upcoming split, saying, “We believe the business remains extremely attractive given the potential to spinoff the company and unlock value. At current prices and assuming the HDD business trades at a 15% discount to Seagate’s HDD business to reflect higher debt levels and no dividend, implies the flash business trades at a significant (~75%) discount to their peer group. We believe the spin-off should create substantial value for investors.”

In addition to starting out her coverage with a Buy, the top-ranked analyst also sets a $90 price target to point toward a one-year upside potential of 19%. (To watch Merchant’s track record, click here)

Western Digital has picked up 17 recent analyst reviews, including 13 Buys and 4 Holds, for a Strong Buy consensus rating. The shares are selling for $75.69, and the average price target, at $88.81, implies a potential gain of 17% for the coming year. (See WDC stock forecast)

Seagate Technology (STX)

The second Citi pick is Seagate Technology, another storage company with a focus on hard disk drives. Seagate got its start in the 1980s when it developed the 5.25-inch HDD – back when hard disks were truly disks. Today, Seagate is known for lines of external and internal hard drives and solid-state disks (SSDs), along with data storage systems for professional and personal use, network storage, and solutions for cloud, edge, and data center storage. Seagate’s products are found in a wide range of applications, from backup and recovery to telecom and video analytics.

Seagate today can boast of a $20.7 billion market cap and expertise in developing hardware that supports secure and scalable cloud computing systems and data backup infrastructure. The company offers its customers the promise of storing greater memory and more data for less cost.

Return-minded investors will find Seagate’s dividend payment of interest. The company in April declared a payment of 70 cents per common share, for a July 5 payment date. The annualized payment of $2.80 gives a forward yield of 2.8%, high enough to take a bite of the current rate of inflation.

When we look at the financial results, we find that Seagate’s fiscal 3Q24 (March quarter) featured a top line of $1.66 billion and a bottom line of 33 cents per adj. share. The revenue was down more than 10% year-over-year, although it met expectations. The non-GAAP EPS was 7 cents better than the forecast – and was a sharp turnaround from the company’s 28-cent EPS loss in the prior-year period. In the quarter, Seagate generated cash from operations of $188 million and returned $147 million worth of capital to investors.

Looking ahead, Seagate guided toward fiscal Q4 revenue in the range between $1.7 billion and $2 billion – compared to a consensus estimate of $1.82 billion.

Checking in again with Citigroup’s Merchant, we find her upbeat, particularly citing cyclical factors and demand growth as well as Seagate’s potential for returns, saying of the stock, “Our Buy rating is underpinned by our view of a cyclical recovery in the HDD market from enterprise/hyperscalers which coupled with our view of AI driven storage demand growth, rational capacity additions and HAMR led cost improvements should enable Seagate to sustain higher revenue and earnings growth ahead and resume a higher pace of shareholder returns.”

Merchant outlines a sound path forward the stock, that could prove attractive to investors: “Looking ahead, we are modeling for revenue growth improvement in line with overall industry growth rate forecast of ~25% y/y CAGR (FY24-FY27E) on continued demand improvement driven primarily by cloud, while gross margins are also expected to continue to expand toward 33%, with potential for upside as HAMR contribution increases. Given Seagate’s opex discipline we model EPS of $6.10 in FY25E and $8.19 in FY26E.”

Following her Buy rating, Merchant sets a price target of $110, suggesting that the stock will appreciate by 11.5% this year.

Turning now to the rest of the Street, where based on an additional 9 Buys and 7 Holds, the stock claims a Moderate Buy consensus rating. The shares have an average price target of $99.69, indicating the stock will stay rangebound for the time being. (See STX stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.