Western Digital Earnings: The Firm Is Hopeful the End Is Near for Downcycle Turmoil

We maintain our $42 fair value estimate for Western Digital WDC 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.

Fiscal fourth-quarter sales declined 41% year over year and 5% sequentially, to reach $2.7 billion. Flash sales dropped 43% year over year, but rose 5% sequentially to $1.4 billion, thanks to end-market demand and pricing beginning to normalize. HDD revenue was down 40% year over year and 13% sequentially, largely due to ongoing cloud weakness as customers continue to work through excess inventory built up over the past two years.

Non-GAAP gross margin came in at 3.9%, compared with 32.3% in the year-ago period and 10.6% in the prior quarter. Poor gross margin led to a dismal non-GAAP operating margin of negative 17.9%. In the quarter, the firm estimates it incurred approximately $211 million in underutilization charges and $27 million of inventory write-downs in the flash market, which exacerbated margin pressure.

Management’s guidance implies Western Digital is nearing the trough of its downturn. It expects fiscal first-quarter revenue to be $2.65 billion at the midpoint and EPS to fall between negative $2.10 and negative $1.80, implying a relatively flattish quarter on a sequential basis.