Seagate Sees Storage Demand Outpacing Supply as AI and Cloud Drive HDD Growth

Key Points

• Demand is outpacing supply: Seagate expects the HDD upcycle to continue through fiscal 2027, driven by public-cloud spending, enterprise data centers and AI-related applications. Customer purchase orders and long-term agreements already cover much of the next several quarters.
• HAMR technology is increasing capacity: Seagate targets at least 25% annual exabyte growth over the next two to three years by moving from 30 TB to 40 TB drives and qualifying 50 TB products in roughly a year.
• Strong cash flow could boost shareholder returns: Pricing remains favorable as supply stays tight, while capital expenditures are expected to remain at 4%–6% of revenue. After reducing debt, Seagate plans to direct more free cash flow toward share repurchases while maintaining dividends.

Seagate Technology NASDAQ: STX CFO Gianluca Romano said the hard-disk-drive maker expects demand for data storage to continue outpacing supply, supported by public-cloud spending, enterprise demand and emerging artificial intelligence applications.

Speaking at a Citi technology conference, Romano said the current HDD upcycle has been developing for more than three years, with the company reporting improving revenue and profitability over that period. Based on purchase orders already in place, Seagate expects additional improvement through fiscal 2027, he said.

“Demand is growing even faster than what we were thinking,” Romano said. “The gap between supply [and] demand is not decreasing, it is actually a little bit increasing.”

Technology Transition Drives Exabyte Growth

Seagate is focusing on increasing the amount of storage capacity shipped, measured in exabytes, rather than expanding the number of drive units it produces. Romano reiterated the company’s target to grow exabytes at a compound annual rate of at least 25% over the next two to three years.

The strategy centers on heat-assisted magnetic recording, or HAMR, technology. Seagate is transitioning from 30-terabyte HAMR drives to 40-terabyte products and expects to begin qualifying a 50-terabyte drive in roughly a year, Romano said.

Moving from 30 TB to 40 TB raises capacity by 33% while holding unit volumes steady, he said, while a shift from 40 TB to 50 TB would add another 25% increase in capacity per drive. Seagate began selling HAMR products nearly two years ago and is already on its second generation of the technology, with a third generation expected in a few quarters, according to Romano.

He said the second-generation HAMR qualification process is progressing more quickly than the first generation because customers are now more familiar with the technology. The initial deployments required extended testing to validate drive configurations in large data-center environments, he said.

Long-Term Agreements Point to Continued Demand

Romano said Seagate has long-term agreements with customers covering the next two to three years and purchase orders for the next four to five quarters. The purchase orders specify product mix, pricing and delivery timing, while longer-term agreements establish exabyte-volume commitments that customers use in planning data-center expansion.

He said customers have requested higher volumes each time the agreements are revisited. Seagate seeks to allocate its expected production capacity without overcommitting on deliveries, Romano said.

Public-cloud customers initially accounted for most of the demand increase seen during the past three years, but enterprise original equipment manufacturers and on-premises data centers have also begun to grow again, he said. Public-cloud customers generally purchase Seagate’s highest-capacity drives, while on-premises customers currently tend to use lower-capacity products.

• Seagate may sell 40 TB drives to public-cloud customers, compared with 28 TB or 30 TB drives for certain on-premises data centers, Romano said.
• The company produces drives ranging from 2 TB to 40 TB to serve varying customer requirements.
• Romano said on-premises customers may ultimately adopt higher-capacity products as their architectures evolve.

AI Applications and Storage Tiers

While AI is a significant current demand driver, Romano said traditional data-intensive applications continue to require substantial storage capacity. He also pointed to video AI, robotics, manufacturing automation, quality control and autonomous driving as potential sources of future storage growth.

Autonomous vehicles and robotic systems generate large volumes of camera data that can be stored for performance improvement and compliance purposes, Romano said. He described video-based applications as particularly meaningful for HDD demand because of their storage intensity.

Romano also addressed key-value, or KV, caching, a storage layer that can sit between bulk HDD storage and flash-based application processing. While some caching tiers may use NAND flash, he said certain warm-storage tiers could use hard drives if Seagate meets applicable performance requirements.

“There are some tiers inside KV cache that can use hard disk drive,” Romano said, adding that Seagate believes it has the technology to develop products for those requirements if the opportunity develops.

Pricing, Investment and Capital Returns

Romano said pricing has improved across customer segments as demand exceeds supply, though the company intends to implement increases in a sustainable manner rather than aggressively. He said Seagate expects revenue and profitability to rise sequentially during each quarter of the current fiscal year, based on existing orders.

On costs, he said HAMR can provide favorable cost-per-terabyte reductions because the company’s internally produced heads and media have similar unit costs regardless of whether the resulting drive delivers 3 TB, 4 TB or 5 TB of capacity. External component costs can vary by market conditions, he said.

Seagate expects capital expenditures to remain within its stated range of 4% to 6% of revenue. HAMR production requires longer manufacturing cycle times and some additional production space, Romano said, but the company believes those needs can be accommodated within that spending range.

The company expects operating expenses to remain near $300 million per quarter during the current fiscal year, with no anticipated need for significant headcount increases. Romano said Seagate has largely completed its planned debt-reduction activities, aside from one remaining high-interest note it may address next quarter.

After that, he said Seagate expects to direct its strong free cash flow toward increased share repurchases while maintaining a focus on dividend returns. Romano said free cash flow exceeded $1 billion, or $1.1 billion, in the prior quarter, though the company has not established a specific free-cash-flow-margin target.

About Seagate Technology (NASDAQ:STX)

Seagate Technology Holdings plc is a data storage technology company that develops and manufactures mass-capacity storage solutions for businesses and consumers. Its product portfolio is centered on hard disk drives (HDDs), which are used in cloud data centers, enterprise systems, network-attached storage, video and imaging applications, and personal computing.

The company also offers solid-state drives (SSDs), external storage products, storage systems, and related data-management and recovery services.

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