Why We Revised Our Price Estimate For Western Digital To $80

Western Digital (NASDAQ: WDC) has performed solidly over the past few years. In fact, the company’s EPS has beaten market expectations in each of the last nine quarters, and its top line has also been trending upwards. In the most recent quarter, the company’s revenues grew by 5.7% year-over-year to $5.12 billion, largely driven by a higher mix of flash-based revenues and strong demand for enterprise solutions. The company’s Data Center Devices and Solutions business shipped about 55 exabytes of data, an impressive 64% year-over-year growth. However, HDD shipments saw a decline as notebook and desktop units struggled to keep up with the pace.

Despite the solid earnings, Western Digital’s stock price has struggled after it hit its 52-week high in March of this year. In fact, the company’s stock is now down by about 27% since the start of the year. Given the industry-wide normalization of NAND pricing and the company’s conservative guidance, which was below market expectations, we have revised our price estimate for Western Digital downward to $80. That said, our price estimate is still ahead of the current market price, as we expect the company to do well over the long run on the back of its underlying strengths. Below, we discuss the factors that could contribute to the company’s growth as well as reasons for the price revision. Our interactive dashboard breaks down our $80 price estimate for Western Digital, and you can modify any of our key drivers and forecasts to arrive at your own estimates.

Why Did We Revise Our Price Estimate?

1. Normalization Of NAND Pricing: In 2017, the demand for NAND outpaced the supply as several cloud companies focused on building data centers. Furthermore, manufacturers were consistently in pursuit of improving technologies such as moving away from 2D flash or increasing the number of layers. As a result, the ASP of NAND increased, fueling growth in profitability. However, the technology has now more or less matured and the manufacturing capacity has increased, resulting in supply-demand balance for NAND in 2018. Consequently, memory companies are experiencing pricing pressure. Per DRAMeXchange, the prices for NAND decreased by 10 to 15% in the second quarter, and we expect this to continue going forward due to oversupply.
2. Conservative Guidance: The company’s second-quarter guidance for revenues of $5.1-$5.2 billion and EPS of $3-$3.10 are lower than the consensus estimates for revenue of $5.4 billion and EPS of $3.60. Investors likely see this as an indication that the company is cautious about the pricing pressure and have therefore reacted skeptically.

What Are Company’s Growth Prospects?

1. Data Center And Devices Solutions To Continue On Its Upward Trend: Given the success of enterprise drives, Western Digital expects greater than 65% growth in exabytes for 2018. This seems to be a reasonable expectation on account of the strong historical trends and favorable outlook. We expect the growth to be fueled by increasing demand for high capacity drives in data centers, artificial intelligence, and big data. The company has also enhanced its offering by investing in Excelero.
2. Increase In The Number Of Units Sold Will Likely Keep The Margins Stable: Despite the pricing pressure, the company’s biggest growth prospect is still NAND products. HDD sales have declined over the years and will likely continue to do so. Furthermore, NAND products generate higher margins than HDDs. Demand for NAND isn’t going to decline anytime soon, which should result in the increase in the number of units sold. Moreover, the transition from 64-layer NAND to 96-layer NAND will likely result in cost savings.

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