What happened

Shares of Seagate Technology (NASDAQ:STX) fell as much as 15.2% lower on Tuesday morning, following the release of solid third-quarter results. As of 12:35 p.m. EDT, the stock had recovered somewhat to a 7.8% negative return.

A black hard drive, opened up to show the mechanism and the magnetic platters.

Image source: Getty Images.

So what

In the third quarter, the hard-drive manufacturer saw top-line sales rising 4.8% year over year to $2.80 billion. Gross margins contracted from 30.8% to 30.2%, but the company also reduced its operating expenses by 26%, so adjusted earnings increased 33% to land at $1.46 per diluted share. Wall Street analysts would have settled for earnings of $1.33 per share on sales near $2.75 billion.

So, why are Seagate's share prices sinking if the quarterly report came up all aces? The stock had gained 57% in the six months leading up to this business update, so it was priced for absolute perfection. Seagate delivered strong results but didn't quite blow investors away. So, here's a quick correction.

Now what

Mind you, Seagate wasn't all that overvalued in the first place. The stock is trading at a very reasonable 11.6 times trailing earnings today, but it's also not much of a leader in its shrinking niche. There's an unstoppable wave of solid-state drives coming in to replace traditional hard drives these days, and Seagate is still looking for a strategy that can keep the company relevant in a rapidly changing market. Compare and contrast Seagate's revenue and cash profit trends in recent years to arch-rival Western Digital (NASDAQ:WDC), which has a much better handle on the solid-state situation:

STX Revenue (TTM) Chart

STX Revenue (TTM) data by YCharts.

It's easy to see why Seagate investors don't want to pay a premium for the stock, making it vulnerable to sharp pricing corrections even after a good-looking earnings report like this one.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.