Seagate Technology (STX) makes high-capacity hard drives used by cloud providers and large corporate data centers.

Those drives store training files, model outputs, videos, customer records, and other data created by artificial intelligence applications.

Cloud customers have been reserving Seagate’s future hard-drive capacity years in advance as the amount of data they retain continues to grow.

Seagate shares closed up about 2.29% at $764.43 on July 29 after the company reported stronger-than-expected fiscal fourth-quarter results and issued an upbeat forecast for the current quarter.

Ahead of the report, TheStreet examined whether limited hard-drive supply would help Seagate raise prices or prevent it from shipping enough products to sustain growth.

The quarter showed that higher prices and greater storage capacity per drive are currently offsetting the production constraint.

Bank of America (BAC) analyst Wamsi Mohan maintained a Buy rating and a $1,150 price target after the results, according to a July 28 BofA note shared with TheStreet.

The target represented about 54% upside from the July 28 price used in BofA’s report.

Seagate’s forecast beat BofA’s margin estimate

Seagate reported fiscal fourth-quarter revenue of $3.63 billion, up 48% from a year earlier.

Its adjusted gross margin reached a record 52.7%, exceeding BofA’s 50.2% estimate.

Key numbers from Seagate’s quarter

• $3.63 billion: Fiscal fourth-quarter revenue, up from $2.44 billion a year earlier.
• $5.71: Adjusted earnings per share, compared with $2.59 a year earlier.
• 52.7%: Adjusted gross margin, up from 37.9% a year earlier.
• $4.1 billion: Seagate’s fiscal first-quarter revenue forecast, plus or minus $100 million.
• $7.30: Forecast adjusted earnings per share, plus or minus 20 cents.
• About 50%: Forecast adjusted operating margin for the fiscal first quarter.

The results and guidance appear in Seagate’s supplemental financial report.

BofA raised its fiscal 2027 revenue estimate to $17.47 billion from $16.86 billion.

The bank increased its earnings estimate to $32.06 a share from $26.88.

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Its $1,150 target is based on 19 times projected calendar 2028 earnings of $61.42 a share, the BofA note said.

BofA calculated Seagate’s year-over-year incremental gross margin at 83.2% for the fourth quarter.

That means Seagate generated about 83 cents of additional gross profit for every extra dollar of revenue compared with the same quarter a year earlier.

The BofA note said Seagate’s current-quarter forecast implies an incremental gross margin of about 88%.

More storage per drive is lifting Seagate’s profit

A hard-drive unit measures the number of physical drives Seagate ships. An exabyte measures the amount of data those drives can store.

Seagate shipped 218 exabytes during the quarter, an increase of 34% from a year earlier. About 90% of that capacity went to data-center customers.

Data-center shipments increased 43% to 195 exabytes, and revenue from that market rose 57% to $2.93 billion.

Seagate management discussed those results on the company’s fiscal fourth-quarter earnings call. Management said physical drive shipments changed little over the past year.

The number of recording heads and disks placed inside each drive increased about 15% to 20%.

The configuration allows Seagate to sell more storage capacity without increasing the number of completed drives at the same rate.

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Seagate is also moving cloud customers toward Mozaic 4+, which uses heat-assisted magnetic recording.

Heat-assisted magnetic recording, or HAMR, briefly heats a small area of a disk so more data can be written into the same physical space.

HAMR products accounted for about 40% of Seagate’s nearline exabyte shipment run rate at the end of fiscal 2026, according to the BofA note.

Nearline drives are high-capacity hard drives designed for cloud and corporate data centers.

BofA attributed Seagate’s margin growth to higher prices, a larger mix of high-capacity products and lower production costs. The note said additional exabytes available above contracted volumes are being sold at higher prices because customer demand exceeds supply.

Seagate shipped 218 exabytes during the its fiscal fourth quarter.

memoriesarecaptured / Getty Images

Cloud customers have reserved capacity through 2028

Seagate’s build-to-order agreements cover customer demand through the end of fiscal 2027, according to the BofA note.

Most of its nearline exabyte supply has already been allocated into calendar 2028.

Customers have also started planning their storage requirements for 2029 and later.

Those contracts tell Seagate how much capacity customers need before manufacturing begins.

They also reduce the risk that the company produces expensive drives without committed buyers.

Some recording components must enter production several quarters before the completed drive reaches a customer.

CEO Dave Mosley has previously explained how AI applications generate data that must remain stored, including model outputs, user interactions and information retained by autonomous software agents.

“As AI accelerates data generation and its value, we see durable long-term demand for mass capacity storage,” Mosley said.

Seagate’s supply plan leaves little room for delays

Seagate is relying heavily on higher storage density instead of rapidly increasing the number of drives it produces. It limits the risk of building factories that could become underused during the next decline in demand.

It also makes each new product transition more important.

Moving from 3 terabytes per disk to 4 terabytes and eventually 5 terabytes requires new manufacturing steps.

Factories may briefly lose efficiency as Seagate adjusts equipment and improves production yields.

New drives must also pass qualification tests at each cloud customer before volume shipments begin.

A delayed qualification or weaker production yield would restrict the number of exabytes Seagate can deliver, even with customer orders already available.

BofA identified slower cloud spending, weaker hard-drive pricing, and increased use of NAND flash storage as risks to its estimates.

NAND flash is used in solid-state drives and can replace hard drives in some applications, although it generally costs more for large-scale data storage.

Seagate’s stock performance increases the consequences of an earnings miss.

A week before the report, Jim Cramer suggested trimming Seagate shares after the stock had gained more than 400% over the previous 12 months.

The next measurable test comes in the September quarter.

Seagate expects revenue of about $4.1 billion, adjusted earnings of about $7.30 a share, and an adjusted operating margin near 50%.

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