A Look At Our $60 Price Estimate For Western Digital

by Trefis Team
Western Digital
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Western Digital (NASDAQ: WDC) stock has seen over 40% price erosion year-to-date. This can primarily be attributed to the pricing concerns, which have weighed on the company’s performance in the recent past, and we expect this trend to continue in the near term. The entire industry is seeing normalization of NAND pricing, and this will likely result in lower earnings for Western Digital in fiscal 2019. In fact, we forecast the adjusted earnings to decline in the high 30s percent for the full year. 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, primarily led by steady growth in its Data Center business. We have created an interactive dashboard ~ What Is Driving Our $60 Price Estimate For Western Digital ~ which shows our EPS and share price projection for the company. You can adjust the drivers to see the impact on the company’s revenues, earnings, and price estimate. Below we discuss our forecasts in detail.

Client Solutions Revenue To Likely Decline In Double Digits

Western Digital’s Client Solution segment, which includes branded flash and removable storage products, has seen strong growth in the recent years, primarily reflecting the impact of the SanDisk acquisition. In 2017, the demand for NAND outpaced the supply as several cloud companies focused on building data centers, and this aided the overall pricing growth. However, the technology has now more or less matured and the manufacturing capacity has increased, resulting in pricing pressure. Western Digital saw mid-teens decline in pricing in Q1 FY19, and it can dip even further in the coming quarters. Moreover, there are uncertainties with respect to the overall demand for flash storage, given the trade tensions with China, among other factors. Accordingly, we forecast the segment revenues to decline in mid-twenties percent for the full fiscal year. Looking at other segments, we forecast a low-mid single digit decline in Client Devices segment, led by lower pricing for flash based products. We expect moderate uptick in Data Center Solutions revenue, which continues to see steady growth amid higher capacity enterprise HDD sales.

Our Price Estimate of $60 For Western Digital

We forecast the company’s overall revenues to decline in mid-high single digits in fiscal 2019. We also expect the adjusted net income margin to decline sharply to low teens amid pricing pressure, translating into adjusted earnings of $9.10 per share in fiscal 2019. We use a price to earnings multiple of 6.6x to arrive at our price estimate of $60 for Western Digital, which is at a premium of 30% to the current market price. The stock is currently trading around $45, which is around 6.3x on forward looking mean earnings as per the data compiled by Reuters.



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