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Seagate (NASDAQ:STX) seems like a bargain. When you look at the numbers, it just jumps out at you, with a forward 2012 P/E of just 3.2 times and even higher EPS predicted for 2013.

Yet, care must be taken with these numbers. They're still based on hard disk pricing that was a result of 2011's Thailand floods which caused an HDD (Hard Disk Drive) component shortage, and that pricing is probably going away.

There are also two major trends in Seagate's market that are important to know. I call them "the good" and "the bad".

The Good

HDD's are still a staple in large data centers. That's not about to change as their combination of capacity and cost is still wildly advantageous, even if they lack SSDs' (Solid State Drive) speed.

This means HDDs are a prime beneficiary of the cloud computing trend, and the trend for more data storage in general.

The Bad

The mobile revolution uses no HDDs. There are no HDDs in smartphones or tablets. Additionally, the largest PC segment - laptops - is also seemingly evolving towards ditching the HDD altogether. Intel's (NASDAQ:INTC) Ultrabooks are now mostly being designed with SSDs due to their lower power requirements, weight and speed.

This means that within a few years an entire large segment of the market will see lower demand for HDDs. As with any market, reduced demand can have a devastating effect on pricing and margins (as well as revenues, suffering both from a volume and pricing effect).

Conclusion

For now the market is clearly seeing the negative effect from mobile and laptops increasingly not using HDDs as overwhelming the data center demand for HDDs. I can't say I disagree, this together with lowered pricing in an after-Thailand market should mean existing earnings estimates are too high.

I'd stand clear of Seagate for now. Can't say I'd short it, though, given the already aggressively low valuation. This conclusion also applies to Western Digital (NASDAQ:WDC).

Source: Seagate: The Good And The Bad