Normalization aka Hangover

This year’s theme is “normalization” as year-over-year (YoY) comps get reset as demand falls back and supply chains clear up as inventories shrink to normal levels. It’s like filling a balloon to massive bursting proportions and then letting the air out back to its normal size. Or when Bruce Banner explodes into the raging Hulk only to revert back to mild mannered (and much smaller) Bruce Banner, again. The question for investors is when does this normalization end? So far, it’s effects are expected to continue into the first half of 2023 based on warnings from major players. Here’s a time line for Seagate and its peer Western Digital.

Seagate Warns

On July 21, 2022, after missing its Q4 2022 earnings, Seagate issued a warning for its fiscal Q1 2023. It cut its revenue guidance to come in between $2.35 billion to $2.65 billion from earlier $3 billion estimates. It cut its Q1 2023 EPS to come in between $1.20 and $1.60, well below the earlier estimates of $2.21. This was mainly due to the weakening of consumer PC demand as a reversion from the pandemic driven exceptional demand last year. The Company will be reducing its production as well to maintain supply discipline.

Western Digital Warns

On Aug. 5, 2022, Western Digital cut its guidance for revenues coming in between $3.6 billion to $3.8 billion versus $4.79 billion consensus analyst estimates. It cuts its EPS guidance dramatically coming in between $0.35 to $0.65 versus $1.92 consensus analyst estimates. Management noted that supply chain constraints are starting to ease, but demand growth has moderated. Cloud business remains strong and robust driven by accelerated digital transformation. Legacy HDD sales continue to decline but flash is strong driven enterprise SSD revenues which doubled sequentially. Consumer spending has softened from weak PC sales and PC OEM customers are aggressively right sizing inventory. The Company is considering separating its HDD and flash businesses as a strategic alternative. 

Not to be Outdone, Seagate Warns Again!

On Aug. 31, 2022, Seagate abruptly cut its Q1 2023 guidance again as it expects revenues to come in between $2 billion to $2.2 billion, down from its (lowered) $2.35 billion to $2.65 billion, which was lowered from the original $3 billion estimates. It expects EPS to fall “meaningfully below” it’s already reduced $1.20, which was reduced earlier from $2.21, just five weeks earlier on its Q4 2022 earnings call. Seagate CEO David Mosley commented that the industry was negative impacted by a series of dynamic market conditions including weaker economic trends in Asian regions putting pressure on inventories and supply chains and more tepid buying behavior among U.S. cloud-based business and international companies. It’s immediately cutting costs and reducing production output to mitigate further damage. This warning came three weeks after key competitor Western Digital issued its guidance cut.

Silver Lining?

CEO Mosely did provide a silver lining, “We continue to see solid demand for our 20+ terabyte product family and remain on-track for volume and revenue crossover with the 18-terabyte platform in the September quarter. The long-term demand drivers for mass capacity storage remain intact and Seagate's strong product roadmap and deep customer relationships make us well positioned to capture these significant future growth opportunities.” Enterprise SSD is still strong, while the legacy HDD continues to weaken. It’s looking like the second half of 2023 would be the soonest possible time frame for normalization to wrap itself up, but hangovers can be tricky to time.

Here’s What the Charts Say

Using the rifle charts on the weekly and daily time frames provides a medium term outlook on the price action for shares of STX. The weekly rifle chart started its reversal back down where it fell through the $79.97 Fibonacci (fib) level and managed to crack its prior fib support at $67.55. The weekly breakdown has a weekly 5-period moving average (MA) at $76.89 as it falls under the weekly 15-period MA at $77.41. Shares fell through the mighty weekly 200-period MA support at $66.03 to test the weekly lower Bollinger Bands (BBs) at $64.78. The weekly stochastic has crossed back down through the 60-band. The weekly market structure low (MSL) buy trigger may get tested at $63.01. The daily rifle chart downtrend is led by the falling 5-period MA resistance at $68.07 followed by the 15-period MA at $75.15 and 50-period MA at $76.52. The daily lower BBs are falling at $61.91. The daily stochastic made a full oscillation diving through the 20-band and then forming a mini inverse pup to fall under the 10-band as it contemplates another mini inverse pup at the 10-band again. Attractive pullback levels sit at $the $63.01 weekly MSL trigger, $60.60 fib, $56.29 fib, $54.47 fib, and the $51.35 fib level. Watch its peer WDC stock as they both tend to move together.