Magic Leap & Seagate – Open and closed.

Seagate fares well while Magic Leap all but closes. 

Magic Leap – Shattered dreams

• Magic Leap has all but shut up shop and given that its IP has already been pledged to JP Morgan as collateral for its debts (see here), it will remain expensive to acquire even if the acquirer pays $0 for the shares.
• Magic Leap is using the cover of the COVID-19 pandemic to announce the ending of its consumer ambitions (see here) and the layoff of around 50% of its workforce.
• This is a clear sign that the company has failed to find a buyer which given the precarious state of its finances, its huge wage bill, the state of AR generally and an unravelling economy is not a big surprise.
• Magic Leap will now limp along trying to win engagement with the enterprise but with both Apple and Microsoft continuing development at full strength, it has very little chance.
• No one in their right mind would engage with Magic Leap over its competitors as its future is very uncertain while one knows with all certainty that both Apple and Microsoft are here for the duration.
• Hence, I suspect that the company will continue to try and achieve a sale but the longer this takes and the more cash it burns, the less likely this is to succeed.
• Hence, some kind of acquihire or a quiet close down of the remainder of the operations is the most likely scenario.
• This is a cautionary tale of how important it is to set realistic expectations and execute to meet them, especially when one is a high profile and high valuation startup.

Seagate FQ3 2020 – Visibility and stability

• Seagate reported reasonable results and gave guidance for the coming quarter which in itself is an achievement in this environment and underlines Seagate’s exposure to the stay-at-home-cloud-usage-explosion trend.
• FQ3 2020 revenues / EPS were $2.72bn / $1.22 pretty much in line with forecasts of $2.65bn / $1.24 demonstrating steady execution in a very difficult environment.
• Seagate did not follow the example of many of its peers as it had the confidence to offer a forecast for the coming three months.
• FQ4 2020 is expected to produce revenues / Adj. EPS of $2.6bn (+/- 7%) and $1.28 (+/- 10%) which again was broadly in line with expectations.
• Seagate has far better visibility than most given its exposure to the cloud which looks like will continue for the balance of 2020.
• This is because the absence of a vaccine means that a good slice of the workforce is going to be at home for at least some of the time for a while.
• Hence, cloud investments are likely to remain above trend for at least 12 months benefitting Seagate.
• Visibility and reliability are in short supply at the moment and for those that have to be in the market, Seagate does offer some degree of protection from the uncertainty surrounding the pandemic.
• I would still prefer the three big cloud players as the main beneficiaries but for those that can’t stomach those valuations, Seagate (along with Intel) is one to consider as both are likely to be more resilient should the valuation of the market start to price in the coming recession.