Shares of Seagate Technology (NASDAQ:STX) went through some wild swings this year, but the stock has still rallied nearly 30% over the past 12 months, compared to the NASDAQ's gain of less than 20%. That's pretty decent performance for a "mature" tech stock that is often owned for income instead of growth.

Seagate certainly looks like an undervalued income stock. It trades at just seven times forward earnings and has a hefty dividend yield of 5.9%. Seagate spent just 61% of its earnings and 42% of its free cash flow on dividends over the past 12 months, which leaves plenty of room for future hikes.

Four disassembled HDDs.

Image source: Getty Images.

Should investors see Seagate as a safe tech play in a volatile market, or does it still face long-term challenges? Let's take a closer look at the hard drive maker's business to find out.

Understanding Seagate's business

Seagate is the world's second-largest maker of traditional platter-based HDDs (hard disk drives), after Western Digital (NASDAQ:WDC). Seagate controls 37% of the market, according to Coughlin Associates, while WD controls 40%.

The key difference between the two companies is that Seagate doesn't rely as heavily on SSDs (solid-state drives) as Western Digital does. SSDs, which use flash (NAND) memory chips, are smaller, faster, more power-efficient, and less prone to damage than traditional HDDs. However, SSDs also cost more than HDDs -- which makes them less practical for large data centers or budget PCs.

Western Digital, believing that SSDs were a disruptive threat to the HDD market, acquired flash memory maker SanDisk in 2016 to become one of the world's leading manufacturers of SSDs and NAND chips. Seagate, however, focused on increasing the capacity of its traditional HDDs for enterprise customers with large data centers. Seagate also has a smaller foothold in the SSD market via a strategic partnership with memory chip maker Micron and a co-investment in Toshiba's former memory chip business.

Two SSDs.

Image source: Getty Images.

This means that falling prices for NAND chips (which peaked earlier this year after a two-year surge) should hurt Western Digital but help Seagate. WD will likely see margins for its first-party NAND products slip, but Seagate could see its SSD margins improve.

How fast is Seagate growing?

Seagate's core strategy is to simultaneously grow its HDD shipments, its average capacity per hard drive, and its average selling price to expand its gross margin. Last quarter, its HDD exabyte shipments grew 49% year over year to 92.9 exabytes.

Its average capacity per HDD rose 40% to 2.5 terabytes per drive, as its average selling price per unit climbed 12% to $72. Those across-the-board improvements boosted its non-GAAP gross margin from 28.9% to 32.4%. As a result, Seagate's revenue rose 18% year over year to $2.8 billion, and its non-GAAP net income surged 147% to $475 million.

Seagate attributed that growth to robust sales of HDDs for hyperscale and cloud storage deployments, which require an increasing number of higher-capacity disk drives to support the growing use of cloud services and streaming media. Seagate is also pivoting away from lower-capacity (sub-1 terabyte) drives, which are more exposed to competition from SSDs.

For fiscal 2018, which ended on June 29, Seagate's revenue rose 4% and its non-GAAP net income grew 31%. For the current year, analysts expect its revenue to grow another 5% and for earnings per share to climb 12%. By comparison, analysts expect WD's revenue and EPS to fall 2% and 23%, respectively, this year, due to the aforementioned challenges in the SSD and NAND markets.

The verdict: Seagate is a buy

Seagate stock has fallen almost 30% over the past six months, due to concerns about rising tariffs, a slowdown in cloud spending, and peaking memory prices. Yet those fears seem misguided. Seagate stated that it was working with suppliers to minimize the impact of tariffs last quarter. Cloud spending should remain high (fueled by more virtualization, apps, streaming media, and cloud services), and memory prices should be more of an issue for Western Digital than Seagate.

Therefore, I believe that Seagate is a worthy buy at these prices. It might not rebound right away, but investors can collect a generous dividend as they ride out the stock's near-term volatility.

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.