Goldman Sachs recently released a report estimating that the global cloud computing market could generate as much as $2 trillion in revenue by 2030. The report predicts that this market will see a compound annual growth rate of 22% through the end of the decade, with new enablers such as artificial intelligence (AI) playing a central role in its growth.
Many companies are already taking full advantage of rising spending from cloud service providers. Chipmakers love Nvidia, BroadcomAnd Marvell technology reported impressive revenue growth from their data centers, thanks to robust demand for their AI accelerators. Memory specialist Micron technology (NASDAQ:MU) also joined the party as AI servers require faster memory chips and more storage capacity, and a similar trend is unfolding in AI-enabled edge devices such as smartphones and personal computers (PCs).
Another company that seems poised to jump on the AI bandwagon thanks to its potentially lucrative growth in the global storage market is Seagate technology (NASDAQ: STX).
Here are some reasons why Seagate is positioned to benefit from the big AI-powered surge in the storage market in the long term.
Seagate Technology is in a huge addressable market
Fortune Business Insights estimates that the data storage market was worth $217 billion in 2022 and could achieve an annual growth rate of 18% through 2030 to generate $778 billion in revenue by the end of the forecast period. Additionally, Micron Technology’s recent results have made it clear that the proliferation of AI is driving growth in data center storage.
More specifically, Micron’s revenue from sales of solid-state drives (SSDs) for data centers more than tripled in the past fiscal year. Micron also points out that traditional storage markets such as PCs will see a nice boost thanks to AI. As CEO Sanjay Mehrotra noted during the latest earnings conference call:
For example, leading PC OEMs recently announced AI-enabled PCs with a minimum of 16 GB of DRAM for the high-end segment and between 32 GB and 64 GB for the mid-range and premium segments, while the average content on all PCs was around 12 GB last year.
Seagate Technology is one of the ways investors can take advantage of this huge opportunity. The company sells hard disk drives (HDDs) and SSDs for data centers and PCs, and its recent results show that it is starting to benefit from the growth of the storage market.
Seagate’s fourth quarter fiscal 2024 revenue (which ended June 28) rose 18% year over year to $1.89 billion. The company’s gross margin improved to 30.9% from 19.5% in the same quarter last year. As a result, Seagate posted non-GAAP earnings of $1.05 per share, compared to a loss of $0.18 per share in the year-ago period.
Analysts expected Seagate to post earnings of $0.76 per share on revenue of $1.87 billion. However, the favorable price environment in the memory market worked in Seagate’s favor and crushed Wall Street’s earnings expectations. Better yet, the company’s guidance for the first quarter of fiscal 2025 points to a significant acceleration in growth.
Seagate expected first-year revenue of $2.1 billion, which would be a 45% increase from the same period a year ago. Additionally, the company expects to report earnings of $1.40 per share for the quarter, compared to a loss of $0.22 per share in the year-ago quarter. The good part is that Seagate is expected to maintain its excellent growth through the entire fiscal year 2025, according to analyst estimates.
Revenue would be a big improvement over the 2024 fiscal year of $6.5 billion, translating into a potential 40% jump. By comparison, Seagate’s revenue fell 11% in fiscal 2024, even as it reported adjusted earnings of $1.29 per share. So the company’s profits are on track to increase by a factor of five in the current fiscal year.
More importantly, Seagate is also likely to maintain its healthy growth levels in the long term, as it has already started to benefit from the AI-driven growth in demand for storage solutions. During the July earnings conference call, Seagate CEO William Mosley noted:
We are also seeing increasing demand for higher-density storage-specific solutions, in part as companies place storage capacity on-premises or in private clouds as they prepare for future AI applications.
It should come as no surprise that Seagate shares are rising, following the 27% gain it has already posted through 2024.
The stock’s valuation and potential upside make buying this stock a no-brainer
As already noted, Seagate’s revenues are expected to increase significantly this year. Analysts predict the company’s bottom line will rise another 36% in the next fiscal year, to $9.09 per share. Seagate shares currently trade at 17 times forward earnings, a discount from the Nasdaq-100 the index’s price-to-earnings ratio of 32 (using the index as a benchmark for technology stocks).
Assuming Seagate posts 17 times forward earnings after a few years and indeed generates $9.09 per share in earnings, as analysts expect, the stock price could reach $154. That points to a potential increase of 42% over the next few years. This makes Seagate an attractive stock to buy now to benefit from the continued growth of the storage market, thanks to catalysts like AI.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.
Artificial Intelligence (AI) Will Drive Solid Growth in This Market: One No-Brainer Stock to Buy on Hand Before That Happens was originally published by The Motley Fool
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