Company Reports

We increase our fair value estimate for no-moat Western Digital to $51 per share from $42, as we raise our profitability expectations during our forecast for the firm’s multiyear rebound. Both hard disk drive, or HDD, and solid-state drive, or SSD, businesses grew sequentially, with improvements in nearline HDD shipments and flash. Western’s profitability was nothing short of impressive in the quarter, and is now already back to what we consider midcycle levels, well before our expectations. We now expect higher profitability in the coming quarters along with strong revenue growth as the firm recovers from the steep market downturn in 2023. We continue to view shares as overvalued, however, as we consider longer-term cyclicality for Western’s commodity products.

Western Digital is a leader in both of the pre-eminent data storage markets: hard disk drives, or HDDs, and NAND flash memory. We think Western's position in these markets paves the way for a strong top-line growth trajectory over the next five years, but believe these markets feature commoditylike products and massive investment requirements that leave Western vulnerable to cyclical downturns and prevent it from carving out an economic moat.

We maintain our $42 fair value estimate for shares of no-moat Western Digital after its December-quarter results aligned with our longer-term recovery thesis for hard disk drive, or HDD, demand. Western met our sales expectations in the quarter and outperformed on profits, similar to peer Seagate Technology earlier in the week. Western’s HDD and flash businesses both grew sequentially in the quarter, which we see as positive evidence of recovering demand after downturns over the past two years. We expect these trends to continue through calendar 2024. We continue to see shares as overvalued and not supported by our expectations for results going forward, even as we model a robust rebound for the firm over the next two years.

We maintain our $42 fair value estimate for no-moat Western Digital after the firm reported a good first quarter and announced intentions to spin off of its flash chip business. We view the spinoff as value-neutral to shareholders as we don’t foresee any significant cost efficiencies gained as separate entities, but a cash infusion could help position the flash business for better growth. The market liked the announcement, and the stock is up about 6%. Western’s fiscal first-quarter results were positive, exceeding our expectations for revenue and profitability. Both HDD and flash markets showed signs of sequential improvement in the quarter, and management expects further gradual strengthening in the December quarter. We see shares as fairly valued.

We maintain our $42 fair value estimate for Western Digital shares after the firm’s fiscal fourth-quarter results met our expectations for revenue and margins. Western Digital’s top and bottom lines are suffering from persistent demand downturns for its hard disk drive, or HDD, and flash businesses. However, management believes Western Digital is nearing the end of the downcycle, and provided guidance that indicates a flattish fiscal 2024 first quarter and expects upside thereafter, on a sequential basis. We too anticipate a recovery beginning fiscal 2024, however, we expect it to be weighted toward the back half of calendar 2024. Sharp downturns like the current one for Western Digital reflect its exposure to volatile market dynamics and its lack of economic moat, in our view. We view the stock as fairly valued.

Western Digital is a leader in both of the pre-eminent data storage markets: hard disk drives, or HDDs, and NAND flash memory. We think Western's position in these markets paves the way for a strong top-line growth trajectory over the next five years, but believe these markets feature commoditylike products and massive investment requirements that leave Western vulnerable to cyclical downturns and prevent it from carving out an economic moat.

We maintain our $42 fair value estimate for Western Digital shares after the firm’s fiscal third-quarter results met our expectations. Western Digital’s sales and profits are suffering from simultaneous downturns for its hard disk drive, or HDD, and flash businesses. The firm’s current downcycle appears set to endure longer than management had initially expected, which aligns with peer Seagate’s commentary from its own earnings release a few weeks ago. We continue to anticipate a recovery beginning in fiscal 2024, but are pushing out a meaningful rebound for a couple quarters from now in our forecast. Sharp downturns like the current one for Western Digital reflect its vulnerability to market dynamics and lack of an economic moat, in our view. Shares are undervalued, but we recommend investors seek moatier names amid current turmoil.

Western Digital is a leader in both of the pre-eminent data storage markets: hard disk drives, or HDDs, and NAND flash memory. We think Western's position in these markets paves the way for a strong top-line growth trajectory over the next five years, but believe these markets feature commoditylike products and massive investment requirements that leave Western vulnerable to cyclical downturns and prevent it from carving out an economic moat.

We’re cutting our fair value estimate for no-moat Western Digital shares to $42, from $50. Western Digital reported worse fiscal second-quarter profitability, and worse fiscal third-quarter guidance, than we expected. The firm is going through a pronounced downcycle in both the hard disk drive, or HDD, and flash chip markets, and had to raise capital via both debt and equity in the quarter for liquidity. The flash market took a step down in the December quarter, and management is guiding for yet another in the March quarter. This market is highly capital-intensive and cyclically volatile, which contributes to poor returns on invested capital and our no-moat rating. If investors wanted to scour for a bright spot, the firm’s HDD business is guided for modest sequential growth in the March quarter. Shares dropped 7% after-hours and are trading close to our updated fair value estimate. We’d recommend investors look for moatier names during Western Digital’s end-market tumult.

Our $50 fair value estimate for Western Digital is unchanged after further rumors of a flash business tie-up with Kioxia sent shares up 7% on Jan 23. We maintain our thesis that Western Digital’s flash business is overly discounted by the market and that execution will be the driver of fundamental value creation. We believe that a spinoff would likely be rewarded by the market, but it wouldn’t immediately unlock fundamental value, in our view, without better execution, which we think has been lacking.

Western Digital is a leader in both of the pre-eminent data storage markets: hard disk drives, or HDDs, and NAND flash memory. We think Western's position in these markets paves the way for a strong top-line growth trajectory over the next five years, but believe these markets feature commoditylike products and massive investment requirements that leave Western vulnerable to cyclical downturns and prevent it from carving out an economic moat.

We lower our fair value estimate for no-moat Western Digital to $50 per share, from $60, in response to poorer expectations for fiscal 2023. We'd been forecasting fiscal 2023 to be a downcycle in both the hard disk drive (HDD) and flash markets, but we now expect it to be a more harsh environment, on both pricing and volume. WD is experiencing lower demand from cloud customers for its HDDs, and flash pricing is cratering amid a glut of supply caused by demand reduction. This is the perfect storm for Western Digital. Its strategy to pursue both the HDD and flash storage markets gave it higher growth potential, but increased its vulnerability to cyclicality and heightened capital intensity that in our view erodes its chance at an economic moat. Shares were flat in early market trading, which may indicate that most of WD's downcycle risk is priced in. When considering its long-term opportunity, we view Western Digital as undervalued, but reiterate our High uncertainty rating.

No-moat Western Digital finished its fiscal fourth quarter largely in line with guidance for top line and non-GAAP bottom line; however, it provided weak guidance for the September quarter that foretells a rough fiscal 2023. We are lowering our fair value estimate to $60 per share, from $70, to incorporate the fiscal 2023 outlook. Western Digital is expecting cyclical weakness across hard drives and flash, and we remind investors that the volatility for these commoditylike products underpins our no-moat rating. Long term, we still doubt Western Digital’s ability to meet its long-term targets, but we do expect a rebound and think it can experience strong midcycle growth from cloud hard disk drives and flash. Long-term investors that remain patient through a cycle may still find upside in Western Digital’s current valuation, but fiscal 2023 appears grim.

Western Digital is a leader in both of the pre-eminent data storage markets: hard disk drives, or HDDs, and NAND flash memory. We think Western's position in these markets paves the way for a strong top-line growth trajectory over the next five years, but believe these markets feature commoditylike products and massive investment requirements that leave Western vulnerable to cyclical downturns and prevent it from carving out an economic moat.

We’re maintaining our $70 fair value estimate for Western Digital shares after its 2022 investor day gave us no compelling reason to alter our long-term thesis on the company. We’re pleased to see Western continuing to pursue growth in cloud applications, but we remain highly skeptical of financial targets that we view as lofty. Western wants to raise its growth and margin profiles across both hard disk drives, or HDDs, and NAND flash chips, but we came away from the investor day wanting for more concrete plans in place in order to do so. We were hoping for a more robust response to last week’s Elliott Management letter calling for the company to split in two, but understand Western’s management aiming to be prudent and patient in responding. All in all, we continue to think of Western Digital as a business with strong technology, but that plays into cyclical markets—which informs our no-moat rating. That said, we still think the market is overly discounting its unique combination of flash and HDD businesses, and view shares as undervalued.

On May 3, activist investor Elliott Management announced a 6% stake in Western Digital and called upon the board to consider a bifurcation of the hard disk drive (HDD) and flash businesses. We aren’t particularly surprised by the news, as Western’s flash business has been scrutinized by media and investors alike ever since its 2016 SanDisk acquisition. We have long viewed Western Digital’s unique combination as overdiscounted by the market, and while we see the merits of a split, we’re skeptical of it being an immediate fix-all. We think the market agrees with Elliott, as shares popped 15%, though we still view Western as modestly undervalued to our $70 fair value estimate.

We think Western Digital’s fiscal third-quarter results were solid against the backdrop of numerous headwinds, including global supply constraints as well as an idiosyncratic contamination in its flash chip production in the quarter that hampered shipments. We’re maintaining our $70 fair value estimate for Western shares. We think the contamination issue is already in the rear view mirror, and current supply constraints don’t alter our long-term forecast for hard disk drive, or HDD, cloud demand and broad flash growth. We continue to view the firm as being prone to cyclical dynamics in both HDDs and flash that can lead to swings in profits like we observed in the March quarter and which results in our no-moat rating. Still, we think the market is overdiscounting the combination of its HDD and flash businesses despite our view of their commoditylike characteristics. We view shares as undervalued.

We’re maintaining our $70 fair value estimate for no-moat Western Digital after the firm lowered its fiscal third-quarter guidance to account for production disruptions in its flash business. We think that Western’s production disruption, while material, is a short-term dynamic and that the company will be able to counteract some of it with raised pricing. We expect demand to remain high in the short term despite higher pricing, and our long-term thesis for Western to increase flash revenue at a double-digit clip through fiscal 2026 is intact. The shares were flat after the announcement despite new guidance being well below consensus, which we think shows the market agrees with our opinion that this is a short-term hiccup. We continue to think the market is undervaluing the long-term prospects of Western Digital’s flash business, despite its commoditylike nature that results in our no-moat rating. We view the current valuation as an attractive entry point for long-term investors willing to play into a cyclical firm with secular growth tailwinds.

Western Digital is a leader in both of the pre-eminent data storage markets: hard disk drives (HDDs) and NAND flash memory. We think Western’s position in these markets paves the way for a strong top line growth trajectory over the next five years, but believe these markets feature commoditylike products and massive investment requirements that leave Western vulnerable to cyclical downturns and prevent it from carving out an economic moat.

We’re maintaining our $70 fair value estimate for Western Digital shares after the company reported solid second-quarter results, but guided for a weaker back half to the fiscal year. Shares fell 8% in after-hours trading due to guidance for a sequential decline in the fiscal third quarter relating to ongoing supply constraints, but we were already expecting a slowdown, and guidance matched our prior forecast.