Western Digital, Seagate slip as Susquehanna downgrades on concerns of weaker demand
Apr. 14, 2022 7:53 AM ET Seagate Technology Holdings plc (STX), WDC By: Chris Ciaccia, SA News Editor
Western Digital (NASDAQ: WDC) and Seagate Technology Holdings (NASDAQ: STX) shares slipped in premarket trading on Thursday after investment firm Susquehanna downgraded the two storage companies on concerns over weaker demand next year.
Analyst Mehdi Hosseini lowered the rating on Seagate (STX) to negative and Western Digital (WDC) to neutral, while also cutting their price targets to $65 and $50, respectively. Hosseini pointed out that even though hard disk drive shipments are likely to be higher in the near-term and in the second-half of 2022 and the average selling price of NAND has rebounded, there is the likelihood for weaker demand next year that could hurt the companies earnings.
"Consistent with our updated Cloud capex model/thesis published on 04/12, we expect a peaking in quarterly Cloud spend in [second-half of 2022], and to be followed by relatively weaker spend trends into 2023," Hosseini wrote in a note to clients, adding that there is a 90% correlation between quarterly cloud capital expenditure spending and hard disk drive shipments.
Western Digital (WDC) and Seagate Technology Holdings (STX) shares fell in premarket trading on Thursday, as Western Digital lost more than 2.5%, while Seagate dipped more than 3%.
In addition, Hosseini noted that while NAND prices are likely to rebound in the June and September quarters, the overall cloud and enterprise demand for it is likely to wane into the year-end, with prices declining again.
As such, Hosseini cut 2023 earnings estimates for both companies to be 30% below current consensus estimates.
The analyst pointed out that both shares of Seagate (STX) and Western Digital (WDC) are down roughly 28% year-to-date on concerns over guidance, but the "extent of deceleration" for cloud capital expenditure spending "is still not dialed into expectations and certainly not in the current consensus."
On April 6, Bank of America surveyed fund managers and found that the ownership of Western Digital (WDC) and Seagate Technology (STX) were "both underweight and under-owned."
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