What a fantastic six months it’s been for Seagate. Shares of the company have skyrocketed 134%, setting a new 52-week high of $974.88. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now still a good time to buy STX? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why Is Seagate a Good Business?
One of two remaining major hard drive manufacturers after decades of industry consolidation, Seagate (NASDAQ: STX) manufactures hard disk drives and solid state drives that store data in data centers, cloud systems, and consumer devices.
1. Skyrocketing Revenue Shows Strong Momentum
Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore’s Law) could make yesterday’s hit product obsolete today. Seagate’s annualized revenue growth of 36.4% over the last two years is above its five-year trend, suggesting its demand recently accelerated. 
2. Operating Margin Rising, Profits Up
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, Seagate’s operating margin rose by 16.8 percentage points over the last five years, as its sales growth gave it operating leverage. Its operating margin for the trailing 12 months was 33.6%.
3. Increasing Free Cash Flow Margin Juices Financials
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, Seagate’s margin expanded by 14.5 percentage points over the last five years. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality. Seagate’s free cash flow margin for the trailing 12 months was 25.5%.
Final Judgment
These are just a few reasons why we think Seagate is an elite semiconductor company, and with the recent rally, the stock trades at 25.6× forward P/E (or $974.88 per share). Is now the right time to buy? See for yourself in our in-depth research report, it’s free.
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