Does STX Stock Still Have More Room to Run After Solid Q4 Earnings?

STX shares have gained 99.5% in the past six months, outperforming the Zacks Computer-Integrated Systems industry’s growth of 74.7%. The stock has also outperformed the Zacks Computer & Technology sector and the S&P 500’s growth of 18.2% and 11.7%, respectively.

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The company has also outperformed its cut-throat competitors in the storage space, like Western Digital Corporation WDC, Everpure P and NetApp, Inc. NTAP. WDC has gained 58.6%, while P and NTAP have risen 18.4% and 78.9% during the same time frame.

After a blockbuster fiscal fourth quarter, the key question for investors is whether STX stock can continue climbing after its enormous rerating. The answer is yes, but the risk-reward is becoming more balanced. Seagate's fundamentals remain unusually strong, yet expectations and valuation have also moved sharply higher.

Let’s delve in deeper.

AI is Creating a Structural Storage Tailwind for STX

AI infrastructure requires enormous amounts of data storage. Training is just one part of the picture. AI inference, data lakes, model development, surveillance, enterprise applications and cloud workloads all produce additional data that needs to be stored. Seagate is well-positioned because its strength is mass-capacity hard disk drives, which are still much more economical than flash storage for many large-scale archival and nearline workloads. Its fiscal fourth-quarter results highlighted strong cloud and AI-driven demand, solid pricing and ongoing supply-demand tightness. Management also highlighted the increasing adoption of its HAMR-based Mozaic technology, enabling it to boost storage capacity without proportionally increasing the physical size of its drives.

HAMR could be the next major catalyst. Seagate's Mozaic platform is designed to significantly increase areal density, allowing customers to store more data per drive. HAMR products accounted for about 40% of Seagate’s nearline exabyte shipments by fiscal 2026-end. Mozaic 4, supporting up to 44TB, is ramping with major cloud customers, with HAMR exabytes expected to reach 50% by year-end 2026. Higher-capacity 4TB and 5TB-per-disk products should further increase exabyte output without requiring a proportional increase in drive volumes.

Strong cloud, AI and data-reuse trends continue to support mass-capacity storage demand, with cloud data centers now accounting for about 90% of exabyte shipments. Customers are extending planning horizons into 2029 and beyond, providing strong demand visibility. Seagate is maintaining disciplined order management and value-based pricing, supported by tight industry supply and favorable demand. This is expected to support healthy margins and profitable growth. The company targets a mid-20% exabyte CAGR, with growth recently exceeding 30%.

Furthermore, data-intensive applications, including video, sensors and enterprise unstructured data, are driving storage demand. Seagate expects application-driven demand to expand over the coming years, with AI still in its early stages but increasingly supporting key-value caching and unstructured data workloads at hyperscalers. Over the longer term, physical AI applications such as robotics and autonomous vehicles could further accelerate data creation and storage needs.

Strong Margins, Cash Flow & Deleveraging Boost STX’s Finances

Seagate delivered strong margin and cash flow momentum, with non-GAAP gross margin expanding for the 13th consecutive quarter to 52.7% and operating margin reaching 44.6%. Free cash flow rose to $1.12 billion in the fiscal fourth quarter, bringing fiscal 2026 numbers to a record $3.1 billion. At the same time, the company reduced gross debt by $1.4 billion during fiscal 2026 and further retired $1 billion of high-yield notes in July. Continued cash generation, pricing gains and operating leverage should support further deleveraging and provide greater flexibility for dividends, share repurchases and technology investments.

The company plans to retire an additional $1.2 billion in debt in September, reducing gross debt to $2.4 billion. Capital expenditures for 2027 are expected to stay within 4-6% of revenue, supporting manufacturing investments.

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However, Seagate faces execution risks from HAMR transitions, including manufacturing complexity, qualification delays and yield issues that could pressure growth and margins. Heavy reliance on large cloud customers also creates concentration risks, while tariffs, trade restrictions, FX and shifts in global tech spending could adversely impact results. Seagate faces tough competition from other players in the data storage industry, including Western Digital, SSD providers and other storage-system vendors, which remains intense.

Upbeat Estimate Revision Trend for STX

STX is currently witnessing an uptrend in estimate revisions. Earnings estimates for fiscal 2027 have moved up 30.7% to $34.99 over the past 60 days, while the same for fiscal 2028 has gone up 30% to $55.85.

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But STX is No Longer Cheap

Going by the price/earnings ratio, the company’s shares currently trade at 21.95 forward earnings, higher than 11.65 for the industry.

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In comparison, the forward 12-month price/earnings multiple for P, NTAP and WDC are 75.41X, 25.68X and 20.73X, respectively.

Does STX Still Have Room to Run?

Several potential catalysts could push STX stock even higher, including upward EPS revisions, sustained pricing power, faster HAMR adoption, strong hyperscaler AI spending and robust free cash flow supporting debt reduction and shareholder returns. The recent quarterly results were exceptional, and the forward revenue outlook suggests momentum is continuing into fiscal 2027. If Seagate can maintain pricing power, expand HAMR adoption and convert AI-driven demand into sustained free-cash-flow growth, the stock can still move higher from current levels.

Flaunting a Zacks Rank #1 (Strong Buy) currently, STX remains a compelling portfolio addition for investors now. You can see the complete list of today’s Zacks #1 Rank stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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