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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.