Western Digital’s Fiscal 2023 Is Proving Calamitous, and We Lower FVE to $42

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.