Barclays downgraded Seagate (STX) to Underweight, its equivalent of a sell rating, from Equal Weight. The company's cost cutting initiatives have largely come to an end, while it is losing share to its rival, Western Digital (WDC), in the high margin hard disk drive market, Barclays believes. Furthermore, Western Digital looks increasingly like it could acquire Toshiba's (TOSBF) memory unit, which could lead more investors to sell Seagate and buy Western Digital, Barclays warned.

COST CUTTING NEAR DONE: Seagate's cost cutting story is "mostly over," as it has already "streamlined its manufacturing capacity, exited certain low margin client segments, and cut its workforce," wrote Barclays analyst Mark Moskowitz. If Seagate's margins increase further, they will either do so at a slow pace or cause its growth to decline, the analyst stated.

WESTERN DIGITAL: Western Digital is gaining share from Seagate in high margin enterprise drives because of the advantages of its helium-based technology, according to Moskowitz. Also, based on recent news, the chances of Western Digital buying Toshiba's memory unit have increased, said Moskowitz, who thinks such a deal would diversify Western Digital further, making it more attractive to investors and potentially causing more of them to sell Seagate's stock and buy Western Digital's shares instead.

MORGAN STANLEY ALSO CAUTIOUS: Morgan Stanley's Katy Huberty cut her price target on Seagate to $37 from $40 and lowered her gross margin estimates for the company. Demand for enterprise hard disk drives has been weak lately, while the company's inventory of hard disk drives is "elevated" and has to be reduced, the analyst wrote. These trends will weigh on its gross margins, she warned. Additionally, Seagate's first helium -filled 10TB drives "had qualification issues" last quarter, causing demand for them to be smaller than expected, she warned. Huberty kept an Equal Weight rating on the stock.

PRICE ACTION: In morning trading, Seagate sank 4.5% to $37.91.