Is Seagate's Strong Margin and Cash Flow Momentum Sustainable?
Seagate Technology Holdings plcSTX delivered a strong finish to fiscal 2026, with revenue and profitability exceeding expectations. The company expanded its non-GAAP gross margin for the 13th consecutive quarter, while free cash flow margins reached 31%, generating more than $1.1 billion in the June quarter, its strongest quarterly performance in more than a decade. For fiscal 2026, Seagate’s non-GAAP gross margin increased 10 percentage points, non-GAAP EPS grew more than 90% and it generated record free cash flow of $3.1 billion.
In fourth-quarter fiscal 2026, the company’s revenue reached $3.6 billion, up 17% sequentially and 48% year over year, while non-GAAP gross margin increased to 52.7% from 47% in the prior quarter. Non-GAAP operating margin rose to 44.6%, and free cash flow increased 17% sequentially to $1.1 billion. The company attributed the margin improvement to its long-term pricing strategy and stronger product mix, supported by strong demand.
Seagate expects these trends to remain favorable. On the last earnings call, management stated that it expects sequential margin and cash-generation growth throughout fiscal 2027, supported by sustained demand, operational efficiencies and disciplined capital expenditures. Fiscal 2027 capital expenditures are expected to remain within the company’s target range of 4% to 6% of revenue. Seagate also expects cash generation to improve throughout the year.
Higher-capacity nearline products and the continued ramp of HAMR-based technology are also supporting profitability. Management said the mix is shifting further toward high-capacity nearline products, while moving from 3-terabyte to 4-terabyte-per-disk products is providing another boost to profitability. HAMR-based products represented 40% of nearline exabyte shipments by June, with Mozaic 4 continuing to ramp.
Seagate is also strengthening its balance sheet. The company ended fiscal 2026 with $3.6 billion of debt, down $1.4 billion year over year, and expects to reduce debt further. Overall, management remains confident in continued revenue growth, margin expansion and stronger cash generation through fiscal 2027.
For first-quarter fiscal 2027, Seagate expects continued revenue and margin growth in the September quarter, backed by the Mozaic rollout and disciplined pricing. Management anticipates first-quarter revenues of $4.1 billion (+/- $100 million). At the midpoint, this indicates a 56% year-over-year improvement.
Taking a Look at STX’s Competitors
Western Digital CorporationWDC reported strong financial performance in fiscal 2026, with gross margin expanding 970 basis points (bps) to 49.1%. In the fiscal fourth quarter, gross margin increased 1,310 bps year over year to 54.4%. The company reported incremental gross margins of 75% in fiscal 2026 compared with 60% in fiscal 2025, and ended the fourth quarter with year-over-year incremental gross margin of 84% to 85%. It expects approximately 80% to 81% incremental gross margin in the first quarter of fiscal 2027. Western Digital anticipates non-GAAP gross margin in the range of 55-56% for the first quarter.
NetApp, Inc.NTAP reported non-GAAP gross margin of 70.5%, up 100 bps year over year in the fourth quarter of fiscal 2026. Operating cash flow was $950 million and free cash flow was $900 million, while fiscal 2026 free cash flow was $1.87 billion. Non-GAAP operating margin for fiscal 2026 was 30.2%, up 190 bps year over year, showing operating leverage as revenue expanded. Management expects to return up to 100% of free cash flow to shareholders in fiscal 2027 and to reduce share count by a low single-digit percentage year over year. NetApp ended fiscal 2026 with $3.58 billion in cash and investments and $2.49 billion of gross debt.
STX Price Performance, Valuation and Estimates
In the past month, STX’s shares have lost 4.7% compared with the Computer Integrated Systems industry’s 8.9% decline.
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In terms of forward price/earnings, STX’s shares are trading at 22.09X, higher than the industry’s 11.46X.
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The Zacks Consensus Estimate for STX’s earnings for fiscal 2027 has been revised up 28.6% to $34.99 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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