Seagate Has Fifty Two Week Backlogs and Reports Monday

Seagate reports earnings Monday and the market is completely unprepared for what the guidance is going to look like. Lead times for high capacity hard drives went from three weeks to fifty two weeks. Contract prices just moved up four percent quarter over quarter, the biggest jump in two years. Hyperscalers are panic buying every terabyte they can find because AI inference is generating data faster than anyone planned for and flash storage is completely uneconomical at the scale they need. Manufacturing is maxed out, nobody expanded capacity because the entire market assumed hard drives were dying, and now there is a structural shortage that will not resolve until 2027 at the earliest. Seagate just guided gross margins above fifty percent for the next twelve months. They beat last quarter with revenues up twenty one percent year over year and record margins, and they are ramping next generation production right as the supply crunch hits hardest. They have a technology lead over Western Digital on high capacity drives and locked commitments from cloud providers through the middle of next year. The stock ran from sixty three dollars to three hundred eighteen but consensus is still calling two point seventy nine earnings per share against what looks like a guidance raise and pricing power returning to an oligopoly that has been stuck in oversupply hell for years. Analysts keep lifting targets but they are doing it in twenty dollar increments like they do not want to get too far ahead of themselves. The setup here is ridiculous. Storage was supposed to be a low growth commoditized nightmare and instead you have got demand running twenty five percent ahead of what Seagate is even producing, prices moving up for the first time in years, and a customer base that physically cannot function without more capacity. If they guide up again on Monday the market is going to have to reprice what this earnings cycle actually looks like.

Three companies make almost all the hard drives in the world. Seagate and Western Digital each control about forty percent. Toshiba has the rest. Building new capacity costs billions and takes two years minimum. This structure always created boom and bust cycles, but what broke the pattern was everyone assuming hard drives were dying. From 2015 through 2023, the narrative was SSDs would take over everything. Manufacturers stopped expanding capacity. Some shut down factories. Industry wide production grew maybe ten percent a year, often less.

Then AI inference went into production and the storage math collapsed. Training a model is a one time cost. Running inference is ongoing and scales with usage. Every ChatGPT query, every AI image, every search generates data that has to be stored. Flash storage costs four to five times more per gigabyte than hard drives. At hyperscale volumes, that difference is not negotiable. Cloud providers need hard drives and there is not enough supply.

Manufacturing is maxed out. Seagate shipped one hundred eighty two exabytes last quarter, up thirty two percent year over year. They cannot just make more. When production lines build thirty two terabyte AI drives, those same lines cannot simultaneously make consumer products. Lead times went from three weeks to fifty two weeks. Western Digital warned of unprecedented demand and raised prices across everything. Seagate followed.

The contracts matter. Seagate locked commitments from five cloud providers through end of 2026, with more expected to sign in the first half of this year. These are not standard orders. They are multi year agreements with fixed pricing and volume commitments. This removes downside volatility and extends margin duration.

Seagate also has a technology edge. Their HAMR drives pack more data per disk, which means higher capacity in the same footprint and lower costs. They shipped over one million HAMR units last quarter and expect fifty percent of production using HAMR by second half of this year. Western Digital is behind on this transition and will not hit volume production until later. That gap gives Seagate both a cost advantage and a capacity advantage.

Gross margins hit forty point one percent last quarter. That compares to low twenties during oversupply years. Operating margin reached twenty nine percent, a level not seen since 2012. The improvement came from product mix, pricing discipline, and advanced technology adoption. Translation: high margin drives under better contract terms.

The market treats this as cyclical. Hard drives always had boom bust patterns, so elevated margins must mean a bust is coming. Wall Street prices Seagate at twelve times forward earnings, implying profits fall sharply soon.

The tension is timing. Factories that break ground in 2026 help supply in late 2027 or 2028, not before. Seagate's Idaho facility will not hit volume production until second half of 2027. Western Digital faces similar delays. The current supply crunch persists through at least mid 2027 using existing capacity, and existing capacity is sold out under contract.

Demand is not slowing either. Data center spending is projected above four hundred billion in 2026, with significant allocation to storage. Hyperscalers are accelerating deployments for real time AI applications, and every deployment needs storage at scale.

Pricing power returned because competition shifted. During oversupply, manufacturers competed on price. Now they compete on guaranteed supply, power efficiency, and technology. Seagate's HAMR drives use thirty percent less power than prior products. For megawatt scale data centers, that efficiency matters over years.

The market values Seagate like this ends next quarter. Revenue guidance for fiscal Q2 is two point seven billion, up sixteen percent year over year. Earnings guidance is two point seventy five, implying thirty percent operating margins. Those are not numbers consistent with imminent margin collapse.

Samsung represents the biggest risk. They have scale and capital to flood the market with capacity if they want share over margins. They have done this before in other product categories.

Demand could weaken. If AI infrastructure spending slows or returns disappoint, cloud providers pause buildouts. That removes the pricing floor.

Execution risk exists. HAMR is complex. Yield issues or qualification delays could slow the ramp and narrow Seagate's advantage over Western Digital.

The cycle still exists. Eventually capacity overtakes demand and prices adjust. The question is when and how fast, not whether it happens.

The market prices Seagate like the good times end next quarter. Twelve times forward earnings implies margins collapse soon. But supply response is constrained by factory construction timelines, not sentiment that can shift overnight.

If Seagate guides fiscal Q3 revenues above two point eight billion and maintains thirty percent operating margins, the stock reprices. Consensus is already behind. The two point seventy nine earnings estimate looks light against two point seventy five guidance, and that was before recent price increases.

Monday's call clarifies three things. Is HAMR ramping on schedule. Have more cloud providers signed contracts beyond the five already locked. Is competitor capacity coming faster than expected. If the answers are yes, yes, and no, the multiple expands.

This is not about 2028 when new factories come online. It is about the next six quarters where supply is sold out, contracts are signed, and margins are structural. The market is still pricing this like 2023.

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This analysis is for educational purposes. It does not constitute investment advice or a recommendation to buy or sell any security. Investors should conduct their own due diligence and consult financial advisors.

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