Western Digital Is Managing Myriad Headwinds Well and We Maintain Our Long-Term Thesis; Shares Cheap

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.