VALUATION HIGHLIGHTS

1. Data Center Solutions constitute 44% of the Trefis price estimate for Western Digital's stock.
2. Client Devices Storage constitutes 31% of the Trefis price estimate for Western Digital's stock.
3. Client Solutions constitute 24% of the Trefis price estimate for Western Digital's stock.

WHAT HAS CHANGED?

Note: Western Digital's FY'23 ended on June 30, 2023.

WDC Stock Performance

WDC stock has witnessed gains of 20% from levels of $55 in early January 2021 to around $65 now (early March 2024), vs. an increase of about 35% for the S&P 500 over this roughly 3-year period.

However, the increase in WDC stock has been far from consistent. Returns for the stock were 18% in 2021, -52% in 2022, and 66% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that WDC underperformed the S&P in 2021 and 2022.

Latest Earnings- Q2 2024

Western Digital reported net sales of $3.03 billion in Q2 '24, down 2% from $3.1 billion in Q2 '23, primarily due to lower HDD, SDD, and Flash shipments. Gross margin declined by 80 bps to 16.2% during the quarter. WDC reported adjusted EPS of -$0.69, vs. $-0.42 in Q2'23.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Western Digital's value that present opportunities for upside or downside to the current Trefis price estimate for Western Digital:

• Client Revenue: Western Digital's second largest revenue stream, Client, could see a moderate revenue rise in the coming years. However, we don't expect any significant rise in revenues for WDC, given the pricing pressure for the storage market. The company has sustained leadership in the consumer hard drive arena. Furthermore, the addition of SanDisk's SSD portfolio has given the company a significant advantage over competing firms. However, Seagate's future strategy could impact Western Digital negatively. If Seagate ramps up its flash portfolio and can offer a similar product range, there could be a loss of revenue for Western Digital. There would be a potential downside of about 5% to the current price estimate if the company's revenues fall in mid-single digits by the end of our forecast period.


• Data Center Solutions Revenue: We estimate that the cloud revenue for Western will grow from its current level of $5.2 billion in FY 2023 to almost $8 billion by the end of our forecast period. This would largely mirror the trend in the enterprise storage market globally. There would be a potential upside to the current price estimate if the company consistently outpaces industry growth and capitalizes its strength in this space as compared to its main rival - Seagate. If Western Digital's cloud revenues increase to $12 billion by the end of our forecast period, there would be an upside of about 20% to the current price estimate.

For additional details, select a driver above or select a division from the interactive Trefis split for Western digital at the top of the page.

BUSINESS SUMMARY

Western Digital Corporation is a leading manufacturer and developer of storage products that help create, manage, experience, and preserve digital content. The company is primarily into the designing and manufacturing of storage devices, flash storage, networking equipment, and home entertainment products under the WD (Western Digital), SanDisk, HGST (Hitachi Global Storage Technologies), and G-Technology brands. The company serves markets addressing storage opportunities for enterprise and cloud data centers, clients, consumer electronics, backup, the internet and other emerging markets such as automotive and home and small office networking.

Western Digital's principal products are hard drives that use one or more rotating magnetic disks to store and allow access to data as well as solid-state drives. Its hard drives are used in desktop and notebook computers, corporate and multiple types of data centers, home entertainment equipment, and stand-alone consumer storage devices. Solid-state drives and flash storage products are used by data centers, enterprise clients, as well as smartphone manufacturers.

SOURCES OF VALUE

Cloud Computing Drives Data Center Sales

We estimate that the cloud storage business of Western Digital, driven by robust growth in the cloud computing industry due to the penetration of high-end storage solutions in data centers, will become the most valuable division by the end of our forecast period.

SSDs and Flash Storage Business Helps Margins

The HDD market is fairly commoditized, and customers are price-sensitive, which has led to lower prices and margins. Comparatively, SSD sales help drive gross margins since they have higher prices and gross margins as compared to traditional spinning disc hard drives. Although the price gap between SSDs and HDDs has narrowed over the years, SSDs are still more expensive than HDDs.

KEY TRENDS

The high growth of digital content is driving the need for higher storage capacity to store, aggregate, host, distribute, manage, backup, and use digital content. The need to access rich data and content is being driven by a highly mobile and increasingly connected user base. The traditional enterprise and client compute markets will continue to demand high-capacity storage solutions and will be best served by hard disk drives where manufacturers compete on the ability to deliver cost-effective, reliable, and energy-efficient mass storage devices. The increasing demand for HD content for media consumption and rich formats, such as HD, DVD, and Blu-Ray, drives the demand for high-capacity disk drive solutions in the end-user market.

Shift From Hard Disk Drives To Solid State Drives

All leading laptop manufacturers are now offering laptops with a hybrid HDD-SSD primary memory and high-end, high-performance laptops with complete SSD memory. Solid-state drives are much more expensive per GB, and this is the primary reason for the slow adoption of SSD as the primary memory component. As production capacity increases and technology changes lead to a drop in SSD prices, we can expect that solid-state drives will become a standard for notebooks and netbooks. These drives are unlikely to find extensive use in desktops in the near future.

Growing Usage Of Smartphones And Portable Devices

Tablets and smartphones generally use solid-state memory chips or flash storage as their primary storage memory, and we estimate that portable device sales will nearly cannibalize notebook and netbook sales by the end of our forecast period. HDD memory is relatively unresponsive, slow, and bulky and will not find application in tablet computers. The increasing popularity of portable devices is the primary reason for growth in the SSD space.

Growth In Cloud Computing And Remote Storage Services

We expect Western Digital's enterprise business to be driven by businesses deploying cloud computing environments in an effort to pool resources and cut costs. Remote storage is becoming a standard for most enterprises and has even gained traction with retail customers with services like Dropbox, Skydrive, and Google Drive.

To achieve the high performance needed with cloud computing, we can expect the hybrid SSD-HDD enterprise storage drives to become popular in the future.