Will Strong Demand Sustain Seagate's Margin Expansion Ahead?

Seagate Technology Holdings plc STX reported strong second-quarter fiscal 2026 profitability, supported by favorable demand trends and improvements in product mix. The company achieved a non-GAAP gross margin of 42.2%, up 210 basis points (bps) sequentially, while non-GAAP operating margin expanded 290 bps to 31.9%. On the last earnings call, management highlighted that the quarter set company records for exabyte shipments, gross margin, operating margin and non-GAAP earnings per share. These results reflected revenue growth across nearly all end markets and continued momentum in the data center demand.

The expansion in gross margin was supported by the execution of Seagate’s pricing strategy and an improving mix of higher-capacity drives as HAMR shipments ramped. Demand for high-capacity nearline drives across global cloud data centers remained strong, contributing to higher capacity shipments and a shift toward more advanced products.

Management stated that the company continues to execute its pricing strategy, supported by supply-demand conditions, while the mix shift toward higher-capacity drives is contributing to cost improvements. It also highlighted that increasing capacity per drive helps lower cost per terabyte, as unit costs tend to remain fairly similar while more content is added per unit.

Seagate expects margin momentum to continue into third-quarter fiscal 2026. The company indicated that the ramp-up of HAMR products is included in its guidance and should contribute to further improvement in gross margins. Management also stated that revenue and profitability are expected to improve sequentially through the rest of fiscal 2026, with additional HAMR products.

For the fiscal third quarter, Seagate expects revenue of $2.9 billion, plus or minus $100 million, representing roughly 34% year-over-year growth at the midpoint. Non-GAAP operating margin is expected to approach the mid-30% range. The company expects sequential improvement in both the top and bottom line throughout fiscal 2026, supported by sustained demand and continued operational execution.

Taking a Look at STX’s Competitors

Western Digital CorporationWDC reported second-quarter fiscal 2026 non-GAAP gross margin of 46.1%, up 770 bps year over year and 220 bps sequentially, above its guidance (44-45%). The improvement was supported by a steady transition to higher-capacity drives and rigorous cost management across production facilities and the supply chain. Non-GAAP operating income totaled $1.02 billion, up 72% year over year, with margins expanding more than 930 bps to 33.8%. Western Digital expects continued momentum in the fiscal third quarter, supported by sustained data center demand and further adoption of high-capacity drives. It expects non-GAAP gross margin in the range of 47-48%.

Micron TechnologyMU reported first-quarter fiscal 2026 non-GAAP gross margin of 56.8%, improved from the year-ago quarter’s 39.5% and the previous quarter’s 45.7%. The non-GAAP operating margin came in at 47%, up from 35% reported in the previous quarter and 27.5% in the year-ago quarter. The company is benefiting from the rapidly expanding AI-driven memory and storage markets. The positive impacts of inventory improvement across multiple end markets are driving top-line growth.  For the second quarter of fiscal 2026, the company anticipates revenues of $18.7 billion (+/-$400 million). Micron Technology projects a non-GAAP gross margin of 68% (+/-100 basis points).

STX’s Price Performance, Valuation & Estimates

In the past year, STX shares have skyrocketed 350.3%, outperforming the Computer Integrated Systems industry’s growth of 108.4%.

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In terms of forward price/earnings, STX’s shares are trading at 23.73X, higher than the industry’s 15.25X.

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The Zacks Consensus Estimate for STX’s earnings for fiscal 2026 has been revised up over the past 60 days.

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Currently, Seagate sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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