Western Digital Corporation (NASDAQ:WDC), a leading manufacturer of electronic storage products for personal storage and enterprise applications, will announce its Q2 fiscal 2014 earnings on January 22. With an industry-wide decline in both the number of PC storage units shipped and the average selling price (ASP) of PC units, the company expects revenues to remain flat over the previous quarter. 
Amid weak results from the core PC storage business, Western Digital expects the next few quarters to be driven by enterprise and cloud storage. Additionally, solid state drives are increasingly becoming crucial for storage companies due to a greater demand for high performance drives in data centers and enterprise storage units. In an attempt to boost its solid state drive (SSD) offerings, the company acquired a number of companies including sTec, Velobit and Virident last year. On the back of these acquisitions and a increasing mix of high-margin enterprise and non-computing units shipped, WDC’s stock price nearly doubled in 2013. We have a $80 price estimate for Western Digital, which is slightly below the market price.
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Enterprise And Non-Compute Segments To Perform
The data storage demand from enterprises and data centers has been increasing due to growing Big Data and digital content. In the previous quarter, WDC shipped almost 8 million enterprise storage units, a 25% increase from the same period in 2012. The company’s management forecasts data requirements to grow at 34% CAGR through 2020, with the trend shifting from personal storage towards enterprise and cloud storage.
In the last quarter, 53% of the company’s revenues were generated by non-PC units that include enterprise storage units and personal storage units for TVs, DVRs and gaming consoles, despite the fact that only 35% of the units shipped were non-PC units. The shift away from desktop and laptop storage could help the company to improve overall margins since enterprise storage units have higher margins than PC storage units. 
Western Digital’s fastest-growing individual segment is the enterprise SSD division, which witnessed a 50% y-o-y growth in revenues in the previous quarter. Although it contributed only $106 million to the top line, the company expects the figure to become more prominent in the coming quarters. High-performance solid state drives are the key to generating high margins for storage companies over the next few quarters. SSD technology is at a stage where consumers can benefit from SSDs with few cheaper alternatives available that match them in performance. In the long run, WDC will look to explore cheaper alternatives to SSDs like its competitor Seagate (NASDAQ:STX), as well as new technologies for enterprise and cloud storage. But in the near future, storage companies are likely to capitalize on the high-margin solid state storage drives.Notes:
- Western Digital Q1 FY 2014 Earnings Call Transcript, Seeking Alpha, October 2013 [↩]
- Flash Memory Is Changing How Companies Buy Storage, Forbes, November 2013 [↩]