How Long Is Demand Weakness Likely To Affect Western Digital?

by Trefis Team
Western Digital
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Western Digital (NASDAQ: WDC) expects the weakness seen in Q1 to spill over to the next fiscal quarter on the back of industry and geopolitical challenges. Despite the underlying strong demand for storage, there will likely be some intermittent slack until demand and supply alignment improves, which may continue to weigh on the stock.

We currently have a price estimate of $50 per share for Western Digital, which is around 10% higher than the current market price. Our interactive dashboard on Western Digital’s Price Estimate outlines our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation.

Western Digital’s commentary regarding industry cyclicality echoes that of competitor Seagate. Furthermore, the company notes that flash pricing weakness – coupled with end customer conservatism and currency volatility – have been compounding business weakness. In order to align its capacity with the underlying demand, Western Digital had planned to cut output by 10% to 15% for calendar year 2019. On the back of these planned actions, the company’s output is likely to start contracting starting Q3 of fiscal 2019. The improving demand-supply equation is also likely to help boost revenue growth in the second half of calendar 2019.

Despite cyclical weakness, Western Digital saw strength across capacity enterprise, surveillance hard drives and embedded flash solutions, as each revenue stream increased by more than 30% year-on-year. Q1 revenue came in at $5.03 billion (-2% q-o-q, -3% y-o-y). Also notable is the fact that the company ended with nearly $4.8 billion in cash and equivalents, which represents more than a third of the $13 billion market cap of the company.

In light of the interim market weakness, Western Digital revised its fiscal Q2 revenue guidance to $4.2-4.4 billion. Given the underlying demand for storage, we expect the current weakness to be temporary.

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