For all of the talk of the death of the personal computer and its potential disastrous effects on PC-dependent companies, it's remarkable that Seagate Technology is performing as well as it has. For that matter, the same can be said of Western Digital . But can it continue?

To that end, Seagate seems the most interesting. I think this is why David Einhorn drastically reduced his shares in the stock by almost 5%, which represented his largest percentage reduction. While it could be just simple profit taking, Einhorn also understands that what Seagate faces is real. While the fundamentals in this company are indeed solid, increased demand for solid state drives, or SSD, is taking a toll on Seagate's core hard disk drive business, or HDD. And placing a bet here on Seagate assumes that there will be a reversal at some point. Seagate's second-quarter results suggest that's not likely to happen.

Mixed results due to mix shifts
Relative to expectations, the results weren't that bad. Revenue climbed 15% year over year, helped by a 24% jump in hard disk drive units. But revenue fell 2% sequentially. As expected, prices continue to be an issue and are still in decline. Average selling prices, or ASPs, fell 7% year over year and 3% sequentially. But the company did surprise investors as client, non-computer segments and enterprise each posted double-digit growth.


Similar to its impact on revenue, ASPs also hurt profitability. The company struggled with its product mix. Margins weren't strong, but arrived in-line with expectations. The company posted 4% year-over-year drop in gross margins, while shedding 1.5% sequentially. Similarly, there was a 8% decline in operating income, which fell 13% from the first-quarter.

Is it really here finally? What do we do now?
It's looking more and more that the market is beginning to shift. Although this has been anticipated for some time, the evidence has not shown up until now. There's no more denying that HDD demand is in decline. But that not to say there's still not a market for Seagate. But there's also a urgency for this company to find new end-markets. And anything short of this could mean a slow death. And that's the key factor here -- the word "slow."

Investors have to decide how much time this company has. And how much confidence there is that management can use capital reinvestments to mitigate further share erosion. What's more, it has to coincide with a transition to SSD. And unfortunately, it's not a situation of competitive outperformance where Western Digital is any better. The market is shifting, and neither company appears adequately prepared. Seagate has to hope that the big talk of "big data" can prolong its relevance in enterprise storage.

I've spoken recently about the strengths of storage kings EMC and NetApp . While tablets and smartphones are indeed eating away at the PC market, I don't see a scenario where either EMC or NetApp will cease needing HDDs.  And although a case can be made that Seagate should be sold to either one of them, what would they gain? Besides, the highly anticipated PC-boom that was expected following the release of Microsoft's Windows 8 has not happened. Chances are, it won't in the future. And since then, there's been a chain reaction.

Dell has decided to go private, Hewlett-Packard has formed a partnership with Google to lessen its Windows dependency. In other words, the PC-death effect has finally arrived. It is now clear that Seagate and perhaps even Western Digital need to change their business models if they care to survive.

What of the stock
The stock is far from expensive. But there's no compelling reason to buy here. What would be the catalyst for revenue growth going forward? Not only does Seagate have to fight to secure market position, staring down the likes of Western Digital, but it must also has to spend to transition its business from HDD to the new SDD standard. It can't rely solely on enterprise storage for its revenue. Likewise, as the gaming industry continues to grow, SSD is rapidly evolving into those devices as well. It may just be the case that investors should follow Einhorn's lead.

While Seagate Technology pays a significant and growing dividend and seems able to generate the cash flow to support it, a global slowdown in demand for digital memory storage has begun to put pressure on margins. Is Seagate worthy of your investment consideration? The Motley Fool answers this question and more in our most in-depth Seagate research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.

The article Why It's Time to Bail on Seagate originally appeared on Fool.com.

Fool contributor Richard Saintvilus has no position in any stocks mentioned. The Motley Fool recommends Google and Intel. The Motley Fool owns shares of EMC, Google, Intel, Microsoft, and Western Digital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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