Seagate has been a rather under-the-radar AI beneficiary with shares up more than 262% over the past year, keeping pace with heavyweight Micron and other strong memory sector performers. The company is working with cloud service providers (CSPs) to supply hard disk drives, stating they are qualified with 6 out of 8 CSPs on their new HAMR-based Mozaic products. As it pertains to data centers and AI, it’s expected that HDDs will handle the high-volume data storage requirements for agentic AI, which relies on persistent access to large volumes of historic data for planning, reasoning and decision-making.

With that said, Seagate’s data center revenue growth is quite slow at just 5% QoQ in Q4, as the company is not exposed to the same swift price surges rippling across DRAM and SSD markets due to locked-in pricing for 2026.

Looking ahead to 2027, Seagate could potentially raise prices with management stating that pricing is not locked-in yet (but notably, management was a bit evasive on the details when asked many times in the Q&A session): “But I would say we have — the vast, vast majority of the volume is already allocated. Calendar '27, we will start working on that fairly soon. Of course, we have very good indication and agreement on volumes, but we have not — we have not fixed the price yet.”

Regardless of exact timing on when pricing can be renegotiated, Seagate’s fundamentals show exceptional margin growth as HAMR products offer stronger profitability and improved cash flows, leading to net leverage of 1.1x. It spells good things to come as HAMR products are only beginning to ramp now yet are making an impact on margins.

Brief Product Overview: HDDs and HAMR Technology

Hard disk drives (HDDs) offer the lowest-cost per terabyte, which makes HDDs ideal for “big data” storage, backups and large AI datasets. Compare this to solid state drives (SSDs) which store data on flash memory chips and are far faster and lower-latency. SSDs cost more per terabyte, thus leveraging a mix of HDDs and SDDs is a popular choice.

As it stands today, SDDs have illustrated significant pricing power compared to HDDs. Therefore, because HDDs are considered more commoditized in the current market dynamics compared to SDDs, I’m quoting the management team in full as to why HDDs are likely to increase in importance as the AI economy plays out – as this is the predominant question Seagate must answer (when comparing to other memory sector stocks):

“So if the concept is that drives aren't working hard, they're in the background, just storing data, that's not the way — a good way to think about it. That's not the way hard drives are being used right now. They're working 24/7. A lot of times, they're optimized for performance themselves, largely streaming performance, not random small block workloads. That's more of a memory thing. And so if you had an application that's random small block, it's probably memory. If you have big data, it's probably a little bit of memory on the front end and a lot of hard drive on the back end. And we think that — there are applications across the entire spectrum, of course, but we think that in the future when we start to talk about the concepts in their enormity, about checkpoints and physical AI and video and things like that, it's large, large data. So the architectural tier that stores the data will probably remain constant for the next decade.”

Heat-assisted Magnetic Recording (HAMR)

Seagate has developed heat-assisted magnetic recording (HAMR) tech for substantial areal density gains, which refers to how many bits can be packed onto each square inch of disk platter (where data is stored). HAMR uses a laser diode to heat a small spot on the disk, enabling polarity of a single bit to be flipped to allow data to be written.

Other HDD tech such as energy-assisted magnetic recording (EAMR), like Western Digital’s ePMR (energy-assisted Perpendicular MR) tech, adds electrical currents to the write head to improve density and write smaller bits. While EAMR is simpler and builds on familiar PMR tech, offering faster time to market, it does not scale to the same capacity as HAMR. WDC acknowledges that EAMR is expanding to 30-40TB drive capacity with roadmaps to 60TB, while HAMR enables capacity to expand to >100TB by 2032.

Seagate says HAMR allows data bits to become even smaller and more densely packed, while remaining thermally stable, and its HAMR-based drives can offer more exabytes of storage while taking up less space in the rack, offering substantial increases in TCO. To put this in number form, Seagate says a 1 exabyte deployment with HAMR would consume ~2 million kWh per year in 204 sq ft of space, versus 3.2 million kWh per year and 400 sq ft of space for a similar PMR deployment.

Management believes that HDDs and higher-capacity storage systems will play a key role in meeting the storage needs for agentic AI, which need constant access to substantial volumes of data for reasoning and decision-making. Seagate projects AI workloads will drive “7.2 zettabytes of nearline storage demand over the next four years, exceeding the entire industry's consumption over the last decade.”

Seagate’s Mozaic3+ HAMR, offering >3TB per disk, is qualified with all major US CSPs and the company says it remains on track to qualify with all global CSPs within the first half of CY26: “We ended the year shipping 3 terabyte per disk Mozaic-based HAMR products to our first CSP customer. And by year's end, quarterly HAMR shipments exceeded 1.5 million units and have continued to ramp. Mozaic 3 HAMR drives are now qualified with all of the major U.S. CSP customers and qualifications for our second-generation Mozaic 4 terabyte per disk products are tracking well to plan.”

In terms of future catalysts, Mozaic4+ HAMR is currently qualifying, with the ramp expected to begin later this quarter and multiple CSPs expected to be qualified over the coming months. Mozaic is powering Seagate’s Exos family of products, which scale to multi-petabyte block storage systems, offering up to 2.5 PB (2,500 TB) in storage.

In terms of volume, Seagate says that quarterly HAMR shipments have exceeded 1.5 million units and are continuing to ramp, or roughly 20% of its estimated ~7.2 million nearline unit shipments in Q2. To note, Seagate is ahead of Western Digital when it comes to HAMR, as WDC is not expecting to ramp its HAMR products until the start of CY27.

HDD Role in ‘Warm-Storage’

We recently covered discussions over the role of SSDs in ‘warm’ storage and Nvidia’s upcoming Inference Context Memory Storage platform in our SanDisk analysis. We had stated:

“Nvidia believes that “AI factories need a complementary, purposebuilt context layer that treats KV cache as its own AInative data class rather than forcing it into either scarce HBM or generalpurpose enterprise storage.” For example, the current inference context hierarchy begins with HBM (G1), providing near-instant access to latency-critical context in active generation, down to SSDs (G3) in the third tier to handle ‘warm’ data, or data that is used regularly but less frequently and still requiring efficient, cost-effective storage. Enterprise or shared storage sits at the bottom of the hierarchy (G4), handling ‘cold’ data, or data stored for long-term retention but much less frequently accessed.”

The connection here to Seagate is that Nvidia is proposing SSDs to take a more central role in the ‘warm’ tier where HDDs sits – this is what Seagate and WDC consider ‘nearline’, where data does not have to be accessed instantaneously but must remain readily available.

Analysts questioned about this possible shift to SSDs in warm storage:

“Dave, while we have you, a little bit of a technical one, are you — what kind of activity are you seeing at sort of the so-called warm tier of storage? It's a question that comes up a bunch in our conversations. We've heard that it's obviously growing, it's growing both hard drive and flash storage is participating nicely, but would love to get your input on it. Because I think there's still — first of all, we love to know if what we're hearing is accurate.

But secondarily, I think there's a lot of people that are assuming that that's really like it's becoming a NAND tier, largely a NAND tier in the GenAI world. And anyway, just love to get any context there that you have.

CEO and Chairman William MosleyCEO and Chairman William Mosley

“When you start talking about big data storage, if you will, in data centers, the tiering architecture is fairly well set and probably won't change based on economics and also architectures that are well known. People know how to play. So if the concept is that drives aren't working hard, they're in the background, just storing data, that's not a good way to think about it. That's not the way hard drives are being used right now. They're working 24/7.

A lot of times, they're optimized for performance themselves, largely streaming performance, not random small block workloads. That's more of a memory thing. And so if you had an application that's random small block, it's probably memory. If you have big data, it's probably a little bit of memory on the front end and a lot of hard drive on the back end. … So the architectural tier that stores the data will probably remain constant for the next decade.”

While there has been some chatter about this newfound role for SSDs to command a leading position in meeting inference-driven storage demand, Seagate does not believe that there will ultimately be much change to storage architectures, with HDDs remaining critical to handle the massive volumes of data generated by AI applications such as agents, video generation, world models and more.

2026 Capacity Sold Out, Beginning to Contract for 2027

One of the reasons for this shift to SSDs is that HDD capacity is already sold out through 2026, with Seagate already turning to signing long-term agreements (LTA) for calendar 2027. Seagate said its nearline capacity is already fully allocated through CY2026, and management expects to “begin accepting orders for the first half of calendar year 2027 in the coming months,” supported by strong demand visibility from some of its major cloud customers seeking supply assurance through 2027 and into 2028.

Considering the supply tightness and elevated level of demand in the market for HDDs, analysts prodded about how pricing would look under new LTAs, and if new agreements would be closed at higher prices. Management noted that 2027 prices are still in discussion and have not been locked in, and implied that higher prices are possible due to demand:

Q, Christopher Muse, Cantor FitzgeraldQ, Christopher Muse, Cantor Fitzgerald

“And then, I guess, maybe bigger picture, as you think about overall average pricing per exabyte, we've gone from kind of down double digits to high single digits. And I think we just exited the quarter down 4% year-on-year. Do you see a world where pricing could flat or even move positive year-over-year?”

CEO William MosleyCEO William Mosley
“Pricing will be dictated by the demand. Right now, the demand is really strong. So I think as we roll through into '27 and '28, we look at how much capacity we're having. We're bringing online by virtue of the fact that we're making all these aggressive product transitions. We'll bring more exabytes to bear and then people go out there and renegotiate for those. I think flat to slightly up is certainly possible. And that's the way we're really managing it as we talk to our customers.”

This ties into a later response where Seagate revealed that pricing has not been locked in for 2027, while 2026 volumes and prices are well defined – meaning any potential upside in 2026 would only come from excess capacity being sold in the open market.

CFO Gianluca Romano explained that Seagate has “very good indication and agreement on volumes, but we have not fixed the price yet,” so if prices begin to move higher as higher-capacity next-gen HAMR devices ramp, considering how tight supply remains relative to demand, Seagate has tailwinds to both revenue growth and profitability.

It should also be noted that in clear contrast to SSDs, HDD prices are not surging – analysts had implied HDD prices exited Q4 down (4%) YoY, while other reports placed prices up ~4% QoQ, a far cry from SSDs rising 40% to 100% QoQ – this is why Seagate’s QoQ Data Center revenue growth pales in comparison to competitors such as SanDisk.

If Seagate can only realize a small low to mid-single digit price increase with 2027 contracts, this suggests growth will likely follow its projections for mid-20% exabyte growth with a few points' upside, rather than sharply accelerating on a YoY or QoQ basis.

Financials:

Revenue Growth

Seagate reported fiscal Q2 revenue of $2.83 billion, up 21.5% YoY and 7.5% QoQ, with sequential revenue growth across nearly all end markets. Growth was relatively steady on both a YoY and QoQ basis compared to fiscal Q1.

Looking ahead, Seagate guided for FQ3 revenue to be $2.90 billion, +/- $100 million, pointing to YoY growth of 34.3%, accelerating nearly 13 points, though QoQ growth would be just 2.7% at midpoint. This softer QoQ read is due to typical March quarter seasonality from edge IoT markets, though management expects Data Center to more than offset that impact.

Seagate also did not provide guidance for the full-year, but did state that its current outlook expects “sequential improvement to both the top and bottom line throughout calendar 2026,” meaning QoQ growth in each quarter through fiscal Q2 2027.

Assuming low double-digit QoQ growth in FQ4 from the midpoint of Q3’s guide, FY26 revenue would roughly project to ~$11.64 billion, up 27.9% YoY, slightly above current estimates for $11.50 billion for 26.4% growth.

Looking out to the first half of FY27, considering management’s commentary and similar QoQ growth rates as the past two years at ~7-8% QoQ, Seagate could exit calendar 2026 (FQ2 27) at ~$3.75 billion, or about 4% above current estimates for $3.61 billion.

Key Segments – Data Center Growth Decelerates to 5% QoQ

Seagate reports under two segments – Data Center and Edge IoT, with Data Center being the company’s primary revenue stream, accounting for 87% of its shipment volume in the quarter but only 79% of revenue.

Data Center revenue increased 28% YoY and 5% QoQ to $2.22 billion in FQ2, decelerating from 34% YoY and 13% QoQ in Q1. Driving this was a deceleration in shipments – Data Center shipments were 165 exabytes in the quarter, up 4% QoQ and 31% YoY, slowing from 17% QoQ and 39% YoY in Q1.

Seagate said it is seeing “sustained demand growth for our high capacity nearline drives across global cloud data centers as well as continued improvement from the enterprise edge,” expecting strong demand trends to continue for some time. In the enterprise OEM specifically, Seagate said it is “benefiting from slight improvement in traditional server units, along with increasing demand for storage servers, driven in large part by the adoption of AI applications and need to store data at the enterprise edge.”

Outside of Data Center, Edge IoT revenue rose 2% YoY and 17% QoQ to $601 million, though it should be this sequential growth followed a soft FQ1 which saw an (11%) QoQ decline. Management said this was driven by anticipated seasonal improvement for consumer products.

Looking ahead to FQ3, management expects Data Center to more than offset typical March quarter seasonality in edge IoT – assuming a similar (7%) QoQ decline in Edge IoT, this would project Data Center revenue to be up just over 5% QoQ, matching Q2’s pace.

Gross and Operating Margin Reach Records

Seagate is witnessing solid margin expansion, driven by pricing and operating leverage, with management pointing to high-capacity drives as a gross margin tailwind while opex continues to decline. Both gross and operating margin reached company records in Q2.

Q2 GAAP gross margin was 41.6%, up 6.3 points YoY and 2.2 points QoQ, while adjusted gross margin was 42.2%, up 6.7 points YoY and 2.1 point QoQ. Management said this was driven by its pricing strategy and improving mix of high-capacity drives as HAMR shipments ramp. Seagate noted that the upcoming Mozaic4+ adds more content per unit, helping reduce costs and improve profitability.

Q2 GAAP operating margin was 29.8%, up 8.8 points YoY and 3.4 points QoQ, while adjusted operating margin was 31.9%, up 8.8 points YoY and 2.9 points QoQ. Seagate continues to see a greater degree of operating leverage, as adjusted opex as a percent of revenue declined to 10.3%, from 12.4% in the year ago quarter and 11.1% in Q1.

Q2 GAAP net margin was 21%, up 6.5 points YoY and just 0.1 points QoQ. Adjusted net margin was 24.8%, up 6.2 points YoY and 2.6 points QoQ.

Looking ahead to FQ3, Seagate projected a notable uptick in both gross and operating margins. Adjusted operating margin was projected to be in the mid-30% range, up around 3 points QoQ assuming this would correspond to roughly 35%. Based on adjusted opex guidance to be ~10% of revenue, this would place adjusted gross margin at ~45% under this framework.

Evercore’s Amit Daryanani questioned about the QoQ strength in margins, more specifically the gross margin – management would not offer much aside from pricing and mix, with a HAMR ramp at a recently qualified customer aiding this expansion:

“Gianluca, I'm hoping you can talk a little bit about the March quarter guide because there seems to be a really sizable uptick in gross margins. I think it's up like 250 basis points or 100% plus incrementals. Could you just — is there anything you would call out in March quarter that's unique that's helping drive that kind of margin expansion? And is this really all coming from the core HDD business? Or is there a potential benefit from the old systems business helping you as well?”

EVP and CFO Gianluca Romano

“Amit, well, I would say, we expect to be a very good quarter. I don't think it's different than what we have done before. It's always based on the pricing strategy and the mix, as you know. We qualified another customer on HAMR, so we will ramp a little bit more volume on HAMR. This is helping us to get better margin. But fundamentally, is not really different in how we think we are going to execute the quarter and is good. I think the incremental margin looks very good.”

Romano had also clarified that Seagate had previously presented a model with a 50% incremental margin above $2.6 billion of revenue, noting that this model covers the next two to three years, with the HAMR ramp helping drive further margin expansion.

EPS

Driven by the margin expansion, Seagate delivered strong sequential EPS growth, with adjusted EPS up 19% QoQ to $3.11, beating estimates by 9.6%. YoY growth for adjusted EPS was 53.2%, decelerating from 65.1% in Q1. GAAP EPS in Q2 was $2.60, up 67.7% YoY, decelerating from 72.3% in Q1.

Looking ahead to Q3, Seagate guided for adjusted EPS to be $3.40, +/- $0.20, representing a more than 25 point acceleration to 78.9% YoY at midpoint. Growth is expected to decelerate back towards ~50% YoY in FQ4 to $3.87.

For FY26, current adjusted EPS estimates sit at $13.02, up 60.8% YoY, while GAAP EPS is projected to be $11.71, up 73% YoY.

Cash Flows and Balance Sheet

Seagate noted that its free cash flow generation reached the highest level in the last eight years, while they also retired $500 million in debt to strengthen its balance sheet.

Operating cash flow in Q2 was $723 million for a 25.6% margin, up 17.1 points YoY and 5.4 points QoQ.

Free cash flow was $607 million for a 21.5% margin, up 15 points YoY and 5.3 points QoQ. Management guided for free cash flow to expand further in Q3, supported by strong demand trends and operational efficiency.

Cash and equivalents totaled $1.05 billion with management noting that total liquidity was $2.3 billion including its undrawn revolving credit facility.

Inventories remained flat QoQ at $1.5 billion.

Debt was $4.5 billion exiting Q2, down from $5 billion at the end of Q1. Seagate said its net leverage ratio was 1.1x, improving 16% QoQ and 63% YoY, with the expectation that net leverage will continue to trend lower as profitability and cash flows increase.

Valuation

Seagate is trading close to peak multiples, a tougher pill to swallow considering the slow sequential growth the company is seeing in the Data Center. Seagate trades at 7.8x forward PS, well above its 5-year average of 3.0x, and just below its recent peak of 8.5x. Shares had traded as low as 1.5x in April.

Looking at the bottom line, Seagate trades at 31.5x forward PE, below its 39.9x average, though it should be noted this is skewed higher due to margins falling negative in 2023. Over the past year, shares are trading nearly double its average of 17x.

Conclusion

Seagate’s data center growth is much slower than other memory peers at just 5% QoQ as the HDD space is witnessing soft pricing power relative to SSDs or DRAM. Data center growth is also unlikely to meaningfully inflect moving through CY26 as price and volume agreements have already been locked in. Seagate does see potential for some pricing upside in 2027 as contracts are open for discussions, yet for now, pricing tailwinds are muted compared to what is seen in enterprise SSDs and DRAM.

Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.

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Seagate: Slow QoQ Data Center Growth, 2027 Capacity Under Discussions