What happened

Shares of Seagate Technology (NASDAQ:STX) stock jumped as much is 17.1% in early trading Monday after the company reported fiscal Q1 2018 earnings that handily beat estimates. Analysts had projected that Seagate would earn $0.86 per share in Q1, but it reported pro forma earnings of $0.96 per share -- a dime above consensus. Seagate stock is still up 12.1% as of 12:30 p.m. EDT.

Hard disk drive

Seagate's cash profits plunged in Q1, but investors aren't giving Seagate a "hard" time over that. Image source: Getty Images.

So what

At $2.6 billion for the quarter, Seagate sales were down 6% year over year. Operating expenses, though, slumped 8%. As a result, despite scoring lower revenue for the quarter, Seagate's operating profit actually increased 15%. On the bottom line, net profits were up 8% at $181 million. Per-share diluted profits -- not pro forma -- grew 12% year over year.

Now what

No doubt, Seagate's results could have been worse, given the revenue decline. That said, I am not certain that investors enthusiastic response to the news is entirely appropriate. Although net profits increased, Seagate suffered a steep drop in free cash flow during Q1.

Cash from operations of $237 million was cut by more than half once capital expenditures were figured in, resulting in free cash flow of only $113 million. That's compared to last year's Q1, in which Seagate generated $451 million in positive free cash -- a 75% decrease year over year.

Granted, at a current valuation of 8.8 times free cash flow, and with analysts projecting 15% annualized long-term growth, Seagate shares look exceedingly cheap. To be cheap, however, Seagate will need to show that it can continue to grow free cash flow at that 15% projected rate. For more on that score, tune in again in three more months.