By Sam Boughedda
Seagate Technology (NASDAQ:STX) has been downgraded to Neutral from Buy, with its price target cut to $55 from $85 by UBS analysts.
The analysts stated in a research note that new risks offset an otherwise solid recovery story.
"The new US Dept of Commerce charge that STX shipped in 2H:20/1H:21 to customers on the Entity List (reportedly Huawei) simply creates too much potential risk and offsets what is otherwise a fundamental set-up that is pretty good, and somewhat similar to MU," wrote the analysts. "While it is hard to handicap the outcome of such an inquiry, Reuters is reporting that STX could face penalties up to a multiple of 2x the value of the transactions."
The analysts feel that it is plausible, based on STX's geographic exposure and high-level commentary as to how this breaks out, that STX could have conservatively shipped ~$100-200MM/Q to Huawei.
"There is a wide range of outcomes, but if the maximum penalty were imposed this could be a number larger than STX's current stated ~$500MM of excess liquidity on its balance sheet stemming from cash on hand together with the revolver," the analysts added. "Overall, we very much still like the longer-term setup for the HDD market and see margins moving higher and LTA's adding stability over time, but there are just too many tail risks here to ignore."