Seagate Technology's (STX) Q2 report presented a curious puzzle. The struggling data storage giant surprised analysts by returning to non-GAAP profitability after three quarters of losses, and even issued what seemed like decent guidance for the coming quarter.

So why are shares sliding?

• While the return to profitability after consecutive losses is a win, the numbers didn't exactly scream success. Non-GAAP EPS of $0.19 was just a fraction of the $0.85 reported a year ago and below analyst estimates. Revenue continued its year-over-year decline, falling 14% to $2.04 billion. These figures paint a picture of a company still recovering from a rough patch, not one thriving in a resurgent market.
• Despite the profit, Seagate remains burdened by bloated inventories. Channel partners, wary of a potential economic slowdown, are reluctant to restock, leaving Seagate with a glut of unsold product. Until these excess drives are cleared, margins will be under pressure, limiting Seagate's ability to fully capitalize on any market uptick.
• The global economic climate remains murky, with inflation and potential recessionary fears dampening demand across industries. This uncertainty makes it difficult for Seagate to confidently predict future performance, contributing to investor hesitation.
• Seagate's Q3 guidance suggests revenue flat to slightly up compared to Q2, with non-GAAP EPS holding steady or increasing slightly. While this might seem positive, it's crucial to remember the low bar set by Q2 performance. Moreover, the guidance comes with significant caveats, with CEO Dave Mosley acknowledging potential downside risks from the uncertain macro environment.
• Investors are wary of celebrating too soon. Seagate's turnaround story has been shaky, with previous predictions of recovery falling short. The persistent inventory issues and vulnerable macroeconomic climate raise doubts about the sustainability of the recent profit and the company's ability to navigate potential headwinds.

While Seagate's return to profitability is a positive development, the stock's decline reflects lingering concerns about the company's long-term health. Investors should adopt a cautious approach, closely monitoring inventory levels, macroeconomic developments, and the company's ability to meet its own guidance before getting carried away by the Q2 profit surprise.