A Closer Look At Our $83 Price Estimate For Western Digital
Western Digital (NASDAQ:WDC) has reported a positive set of results in the current fiscal year thus far, with healthy revenue growth and a company-wide gross margin improvement. The company’s gross margin has been slightly higher than expectations due to an improved sales mix. Furthermore, the company has reported a limited increase in operating expenses due to expense synergies from the SanDisk acquisition. This has driven up the operating profit margin significantly this year. Western Digital’s management expects operating expenses to remain flat on a quarter-over-quarter basis in the coming quarters, which could help translate revenue growth directly to profits. We expect this trend to continue through the end of the current fiscal year. We have summarized our forecasts in an interactive model. You can modify assumptions such as changes in expected segment revenue or EBITDA margins to see how they impact the company’s value. The image below shows one of the key steps in identifying Western Digital’s valuation sensitivity to changes in its segment revenues. We detail how changes in revenue or segment EBITDA margin impacts total EBITDA, which then impacts enterprise value (assuming a constant EBITDA multiple).
Western Digital’s stock price has fluctuated between around $73 and $95 in the last year. We have revised our long-term price estimate for Western Digital to $83 from just over $75 previously. Our new price estimate is about in line with the current market price. The upward revision was driven by better-than-anticipated expense management by Western Digital in recent quarters, which drove EBITDA margin higher. In addition, SanDisk’s flash storage portfolio helped drive gross margins higher, relative to our prior expectations. Our forecasts for the year are summarized in our dashboards for Western Digital. If you have a different view, you can modify various inputs to see how updated forecasts and estimates impact the company’s valuation.
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