Seagate Technology was in focus on Monday as Morgan Stanley named it the top pick in the IT Hardware space, replacing Western Digital.
Seagate shares jumped more than 9% to hit all-time high.
“Over the course of the last few weeks, our HDD checks have picked up sustained hyperscaler demand strength, elongating customer visibility, firmer pricing into 2027, and an overall improving HDD end-market,” analyst Erik Woodring wrote in a note to clients. “And yet investors continue to under-appreciate the fundamental strength that this environment will translate into for STX and WDC, as both names trade at just 13-14x our new CY27 EPS (10x bull case EPS), which is 25- 30% above Consensus in FY27, and 45-50% above Street in FY28. Simply put, HDD's are perhaps the investments most-levered to data center spending amongst the 'AI picks and shovels' (80-90% DC rev exposure vs. peers at 50%), remain a critical component bottleneck for CSPs, have an attractive industry structure (rational oligopoly benefitting from demand [is greater than] supply and no capacity growth), and our checks are strengthening, which keeps both STX and WDC as our most-favored Overweights and names we'd be adding aggressively to during periods of market-related volatility, though with this report we are switching our 'Top Pick' to STX (from WDC) due to valuation and gross margin expansion factors.”
Woodring reiterated his Overweight rating on Seagate and Western Digital and upped his price targets to $582 and $380 from $468 and $369, respectively.
Delving deeper, Woodring said his checks have turned even more bullish on hard disk drive pricing lately. Major hyperscaler customers are now coming closer to $20 per terabyte for purchases in 2027 and 2028, compared to current estimates of around $13 to $15 per terabyte. That suggests that negotiations are starting 30% higher (or more) than current estimates and nearly 20% higher than the bull case.
“Said differently, given the criticality of the HDD, the strength in HDD demand, and the fact there is no new HDD unit capacity coming online, supply/demand remains extremely favorable for pricing and the HDD vendors appear increasingly willing to extract this pricing power,” Woodring explained.
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