Seagate (STX) Shares Drop 4.8% Following Latest Earnings: Is a Recovery Possible?

Seagate Stock Update: Recent Performance and Earnings Highlights

Over the past month, Seagate (STX) shares have declined by approximately 4.8%, trailing behind the S&P 500 index. As the company approaches its next earnings announcement, investors are watching closely to see if this downward trend will persist or if a turnaround is on the horizon. To better understand the current outlook, let's review Seagate's latest quarterly results and the factors influencing its performance.

Q2 Results Surpass Expectations

In its fiscal second quarter of 2026, Seagate posted non-GAAP earnings of $3.11 per share, exceeding both the Zacks Consensus Estimate of $2.83 and the upper end of management’s guidance. This marks a significant improvement from the $2.03 per share reported in the same period last year. The company’s bottom line also grew 19% compared to the previous quarter, reflecting strong execution of strategic initiatives and effective use of its technology roadmap to meet rising demand.

Revenue on a non-GAAP basis reached $2.83 billion, outpacing consensus estimates by 2.7% and rising 22% year over year. This growth is largely attributed to robust demand in the data center sector, with steady increases in high-capacity nearline drive sales to global cloud clients and ongoing momentum at the enterprise edge. Seagate anticipates this positive trend will continue, supported by a healthy build-to-order pipeline.

Management emphasized that today’s data centers require solutions that deliver both high performance and cost efficiency—a need that aligns well with Seagate’s technology strategy. The company’s focus on increasing areal density positions it to benefit from the expanding volume of AI-generated data, suggesting sustained demand over the long term.

During the quarter, the average capacity of nearline drives rose 22% year over year to nearly 23TB per unit, with even higher averages among cloud customers. This demonstrates strong adoption of larger drives. Revenue per terabyte remained steady, indicating disciplined pricing and positioning Seagate to capitalize on strong market demand and limited supply.

Revenue Breakdown by Market Segment

Starting in the first quarter of fiscal 2026, Seagate began reporting revenue across two primary segments: Data Center (including nearline products and systems for cloud, enterprise, and VIA customers) and Edge IoT (serving consumer and client-focused markets such as network-attached storage).

• Data Center: This segment contributed 79% of total revenue, or $2.2 billion, representing a 5% increase from the previous quarter and 28% growth year over year. The gains were driven by ongoing strong demand from cloud providers and improvements in enterprise and OEM channels.
• Edge IoT: Accounting for 21% of revenue at $601 million, this segment grew 2% year over year and 17% sequentially, benefiting from seasonal strength in consumer products within the VIA client market. Seagate expects the VIA market to expand further, especially as VIA nearline products gain traction in data centers.

Exabyte Shipments

Seagate delivered 190 exabytes of HDD storage during the quarter, marking a 26% increase year over year and a 5% rise from the prior quarter. The data center market represented 87% of these shipments, fueled by persistent demand from cloud customers and sequential growth in enterprise OEM sales. Of the total, 165 exabytes were shipped to data center clients, up 4% sequentially and 31% year over year.

Profitability and Margins

Non-GAAP gross margin reached a record 42.2%, up 210 basis points from the previous quarter and 670 basis points year over year. This improvement was driven by greater adoption of high-capacity nearline products and ongoing pricing strategies, resulting in a modest sequential increase in revenue per terabyte—a trend expected to continue into the next quarter.

Operating expenses on a non-GAAP basis were $290 million, unchanged from the prior quarter and up 1% year over year, in line with expectations. Non-GAAP operating income totaled $901 million, a significant increase from $538 million a year earlier, supported by strong sales and effective financial management. The operating margin expanded to 32%, up 880 basis points year over year. Adjusted EBITDA reached $962 million.

Financial Position and Cash Flow

As of January 2, 2026, Seagate held $1.05 billion in cash and cash equivalents, compared to $1.1 billion at the start of the quarter. Long-term debt, including current portions, stood at $4.5 billion, down from $4.9 billion previously. Operating cash flow was $723 million, up from $532 million in the prior quarter, while free cash flow climbed 42% sequentially to $607 million—the highest level in eight years.

During the December quarter, Seagate returned $154 million to shareholders through dividends and retired approximately $500 million in exchangeable senior notes due in 2028, reducing potential dilution and preserving cash for future share buybacks.

Positive Outlook for Fiscal Q3

Seagate expects strong demand from global cloud customers to more than offset typical seasonal slowdowns in the edge IoT market during the March quarter. For the fiscal third quarter, the company projects revenue of $2.9 billion (plus or minus $100 million), representing a 34% year-over-year increase at the midpoint. Non-GAAP earnings are forecast at $3.40 per share (plus or minus $0.20), with operating expenses anticipated to remain around $290 million. The operating margin is expected to reach approximately 30% at the midpoint of revenue guidance.

Free cash flow is projected to rise further, driven by robust demand, operational efficiency, and disciplined capital spending. Seagate will continue to focus on capital discipline while advancing its HAMR technology, with capital expenditures for fiscal 2026 expected to remain within 4%–6% of revenue.

Estimate Revisions Since the Report

Following the earnings announcement, analyst estimates have trended higher, with the consensus estimate rising by 22.7% as a result of these updates.

VGM Scorecard

Currently, Seagate holds an A for Growth, but scores a D in Momentum and an F in Value, placing it in the lowest tier for value investors. The overall VGM Score stands at C, which is most relevant for those not focused on a single investment strategy.

Looking Ahead

With upward revisions in estimates and a favorable outlook, Seagate has earned a Zacks Rank #1 (Strong Buy). The stock is expected to deliver above-average returns in the coming months.