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.

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