Tech hardware was already struggling, but ‘market conditions have deteriorated’ even more

Tech hardware was already struggling, but ‘market conditions have deteriorated’ even more

Morgan Stanley analyst downgrades Seagate, and says it’s difficult to gain confidence in end-of-year recovery for an inventory-laden, demand-lacking hardware sector given recent earnings reports

Tech hardware has been struggling with oversupply and crumbling demand for almost a year, but early first-quarter earnings reports suggest that “market conditions have deteriorated” even more in recent weeks.

Seagate Technology Holdings PLC (STX)shares were on track for their worst week in more than six months Friday after the data-storage device company reported a surprise loss for the latest quarter Thursday and forecast revenue that was below Wall Street expectations at the time. Shares dropped 9.2% Thursday to close at $57.08, putting them on track for their worst week since the one ended Sept. 2, 2022, when the stock declined 12.3%. Shares were down about 1% in Friday trading.

Morgan Stanley analyst Eric Woodring downgraded the stock to equal-weight from overweight Friday and cut his price target to $60 from $72, while starting to doubt the general view that the market will turn around some time in the second half of the year.

“We still see STX as the best stock in our coverage to play the eventual cyclical hardware recovery, but market conditions have deteriorated in the last 6 weeks, and visibility/confidence in the timing of STX’s recovery is limited, creating a more difficult setup for the stock to outperform in the next few quarters, in our view,” Woodring said in a note.

“It’s difficult, in our view, to gain full confidence in an end-of-year recovery today given the limited visibility [management] has themselves, plus more cautious commentary on overall IT spending trends from others in our hardware coverage this week,” the Morgan Stanley analyst said.

The analyst said he expects Seagate stock to underperform even after Thursday’s drop “until clearer signs of a demand recovery emerge, most importantly from large U.S. hyperscalers that are currently seeing a meaningful deceleration in growth.”

“Hyperscalers” are an industry term for public-cloud providers like Microsoft Corp.’s (MSFT) Azure, Inc.’s (AMZN) AWS, Alphabet Inc.’s (GOOGL)(GOOGL) Google Cloud Platform, and Oracle Corp.’s (ORCL) Cloud Infrastructure.

Woodring said he is closely tracking key industry data, and said the stock will “outperform when more concrete signs of a market recovery emerges.”

This past week, Lam Research Corp. (LRCX) reported a lower-than-expected outlook late Wednesday, hours after Netherlands-based ASML forecast a mixed 2023 as inventory continues to get digested in the channel, setting up for a possible 2024 recovery, and Taiwan Semiconductor Manufacturing Co. (2330.TW)trimmed its outlook but kept its capex forecast intact.

Of the 25 analysts who cover Seagate, 10 have buy-grade ratings, 13 have hold ratings and two have sell ratings, along with a price target of $62.22, after 11 analysts cut price targets.

Seagate shares are up nearly 7% year to date, while the S&P 500 index is up nearly 8%, and the tech-heavy Nasdaq Composite Index had advanced more than 15%.

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