Western Digital Shares Are Up 12% Since Earnings. Is the Stock a Buy?

Western Digital released its fiscal first-quarter earnings report on Oct. 22. Here’s Morningstar’s take on Western Digital’s earnings and stock.

Key Morningstar Metrics for Western Digital

• Fair Value Estimate
  : $420.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : None
• Morningstar Uncertainty Rating
  : High

What We Thought of Western Digital’s Fiscal Q1 Earnings

Western Digital’s fiscal first-quarter revenue rose 55% year over year to $4.4 billion, beating guidance by the widest margin since the SanDisk split. This was entirely driven by pricing. The second-quarter revenue guide was 13% above FactSet consensus, but shares fell 3% following the report amid lingering concerns about an easing of the supply constraints driving earnings growth.

Why it matters: Margin gains now rest almost entirely on price, while exabyte growth was a bit below our expectations. Perhaps the most negative indicator was management’s commentary that current pricing dynamics could slow after about three to four more quarters.

• The CFO conceded that long-term agreements cover less volume and that pricing depends on how far out they run, and that some pricing came from spot sales of uncontracted capacity. That ties today’s margins to tight supply, the piece that reprices first when the cycle turns.
• Exabyte growth trailed management’s 25%-plus long-term nearline target and its main rival’s pace. However, management said this was the trough and expects growth to keep rising over the next several quarters.

The bottom line: We maintain our $420 fair value estimate for no-moat Western Digital. We raise our fiscal 2027 adjusted earnings per share forecast to $24.20 from $20.78 on faster pricing, but less aggressive pricing assumptions starting next year offset this.

• Shares are just shy of our fair value estimate, with recent pressure likely influenced by broader negative artificial intelligence thematic sentiment. We think worries about the cycle peaking and pricing slowing do not help either. Western Digital remains volatile and tied to the AI buildout.

The following are excerpts from Morningstar’s company report on Western Digital.

Fair Value Estimate for Western Digital

With its 3-star rating, we believe Western Digital stock is fairly valued compared with our long-term fair value estimate of $420 per share. We expect Western Digital to increase its revenue at a compound annual growth rate of 33% from fiscal 2026 through 2031. HDD growth is largely driven by data center nearline storage demand, which we expect to be robust, driven by AI-related demand.

We expect Western’s gross margins to be structurally higher than in the past, driven by steadier data center demand and more disciplined pricing and supply management from the HDD industry.

Read more about Western Digital’s fair value estimate.

Economic Moat Rating

We do not think Western Digital possesses an economic moat. While the HDD market has high barriers to entry, given the massive capital investment required along with the technical expertise needed to design and manufacture industry-leading HDDs, we find the industry is not amenable to moats because HDDs are commodities with no pricing power. This leads to occasionally brutal business cycles and erodes economic profits, even though the industry is a functional oligopoly.

Read more about Western Digital’s economic moat.

Financial Strength

After the SanDisk spinoff, Western Digital has deleveraged and is generating healthy free cash flow while returning capital to shareholders. The company currently holds minimal debt.

The firm reinstated its dividend after the spinoff, and we expect healthy cash flows to support future dividend increases. We forecast free cash flow generation to be 80% or more of net income.

Read more about Western Digital’s financial strength.

Risk and Uncertainty

We assign Western Digital a High Uncertainty Rating largely because it is vulnerable to pricing and cyclical downturns, and because it is difficult to model the impacts of the AI buildout.

Another key risk that is hard to discount is Western’s HDD business facing obsolescence over the very long term (more than 10 years from now), depending on how HDD and SSD technologies develop and how data center workloads evolve.

Read more about Western Digital’s risk and uncertainty.

WDC Bulls Say

• Demand for data center buildouts is only increasing, driven by long-term structural trends such as AI and the Internet of Things. This could prolong the current upcycle and make it more durable than previous cycles.
• Advancements in higher-capacity HDDs and new technologies like energy-assisted recording should modestly expand Western’s midcycle gross margin.
• The HDD industry will be more disciplined on supply and pricing than in the past, which will reduce the cyclicality of the industry and increase profitability, warranting a higher valuation for Western.

WDC Bears Say

• The HDD market is commodity-like and cyclical, leaving Western Digital vulnerable to market pricing declines that can shrink the top line and sink margins. In HDD downturns, these stocks can crater.
• The HDD industry has been through upcycles before, but in the end, it always goes through another cycle, and we may be getting closer to a peak in the AI cycle.
• The risk of HDD obsolescence, driven by displacement by SSDs, will always hang over Western. As more end markets phase out HDDs, the company is set to almost exclusively rely on the nearline storage market.

This article was compiled by Colin Laidley.