Seagate's Problem: The Industry Is Way Too Healthy

Shares of hard-drive giant Seagate Technology (Nasdaq: STX  ) plunged as much as 10.4% overnight, hurt by a disappointing fourth-quarter report. The stock climbed back a bit as investors digested the numbers, but the report certainly took the edge off Seagate's razor-sharp recent gains. Shares have still soared about 30% since early June.

Seagate matched its own revenue guidance with $4.5 billion in sales, but analysts were looking for $4.6 billion. The real damage flows from the bottom line, where non-GAAP earnings of $2.41 per share missed Street estimates by $0.10.

The culprit, ironically, was the hard drive industry's surprisingly quick recovery from last year's flooding disaster in Thailand. That event allowed Seagate and arch rival Western Digital (NYSE: WDC  ) to boost unit prices under the unbreakable laws of supply and demand, creating huge revenue streams and even more impressive profits while the supply chain was being rebuilt.

Still, CEO Steve Luczo talked about the "benign environment we have." Western Digital's report from last Friday underscores the health of the traditional drive market, though Luczo reminded analysts that we'll all get more clarity into the market for PC systems when Hewlett-Packard (NYSE: HPQ  ) and Dell (Nasdaq: DELL  ) report results in a month or so. He expects unit prices to stay fairly stable over the next three months.

Looking ahead, Seagate is making moves in solid-state storage in order to stay relevant for the long term. The company now has a brand-new general manager for SSD products, who was recruited from Micron Technology's (Nasdaq: MU  ) enterprise SSD division. For now, the company is building flash-based cache storage into traditional magnetic drives and calling it a hybrid drive. The buyout of Samsung's hard drive operations gave Seagate a cozy working relationship with the world's largest flash memory maker, and Seagate has also invested in smaller SSD specialists on the side. Moreover, the company might buy an SSD expert or two with its newfound stash of cash.

So the earnings miss might scare jumpy traders, but Seagate's long-term future looks solid (pun intended). My bullish CAPScall on this stock remains firmly in place. Short of starting a real-money position, that's just about the highest compliment a Fool can pay to any stock.

Also, to learn a bit more about a revolution these hard-drive makers are supporting, be sure to check out our special free report: "The Only Stock You Need to Profit From the NEW Technology Revolution."

Fool contributor Anders Bylund owns shares in Micron Technology but holds no other position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Western Digital. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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