Pricing Headwinds Will Likely Continue To Impact Western Digital’s Near Term Growth

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Western Digital’s (NASDAQ: WDC) stock price has seen over 20% gains year-to-date. This can be attributed to expected improvement in earnings, after a sharp decline in the recent quarters, partly led by pricing headwinds. However, the stock price seems to be trading at a very low multiple of its expected fiscal 2019 earnings, and it could have some room for further growth. This note details Trefis’ forecasts for Western Digital for the fiscal 2019. You can view our interactive dashboard analysis on ~ What Is The Share Price Estimate For Western Digital Based On Expected 2019 Earnings? ~ for more details on the expected performance of the company. In addition, you can see more of our data for information technology companies here.

What Are The Key Sources of Western Digital’s Revenue, And How Have They Trended In The Recent Quarters?

  • Western Digital generates its revenues primarily from sales of various storage products, clubbed under three key segments ~ Data Center Solutions, Client Devices, and Client Solutions.
  • Data Center Solutions includes products for the enterprise market. It accounts for close to 30% of the company’s total revenues.
  • Client Devices includes storage products for computing devices, such as PC and notebooks. This is the largest segment for the company in terms of sales, and it generates close to 50% of the total revenues.
  • Client Solutions includes flash-based and other external storage devices. It accounted for 22% of the company’s total sales in fiscal 2018.
  • Total Revenues for Western Digital have largely trended lower over recent quarters, declining from $5.0 billion in Q3 FY 2018 to $3.7 billion in Q3 FY 2019. The decline can primarily be attributed to softer NAND pricing, and lower demand from enterprise business.

How Much Can Western Digital’s Top Line Decline In 2019?

  • Western Digital’s top line will likely decline 19% to $16.7 billion in fiscal 2019. This decline will be seen across the segments.
  • Data Center Solutions revenue grew 9% in fiscal 2018, and it will likely decline 16% to $5.2 billion in fiscal 2019. Data Center Solutions’ revenue decline can be attributed to lower enterprise storage products sales, given softer enterprise demand. The global server market grew 5% in 2018, and it could see a slowdown in 2019, given the expected launch of new processors in the near term.
  • Client Devices sales are trending lower amid lower PC sales, given the shortage of Intel chips. The segment revenues grew 6% in fiscal 2018, but they are expected to decline 20% to $8.1 billion in fiscal 2019.  Intel saw strong data center demand over the last year or so, which led to production issues for its 14nm chips. This trend is expected to continue in the near term, and could impact Western Digital sales as well.
  • Client Solutions sales are also declining due to pricing headwinds for flash-based products, given a global decline in NAND prices. The segment revenues grew 12% in last fiscal, while they are expected to see a 23% decline to $3.6 billion in the current fiscal. NAND prices saw a 20% dip in Q1 2019, and they are expected to see another 15% decline sequentially in Q22019.

How Does The Revenue Growth of Western Digital Compare To Its Peers?

  • Western Digital’s revenue decline in the recent past has been higher than Seagate and NetApp.
  • Western Digital’s revenue grew 8% in fiscal 2018, and will likely end fiscal 2019 down 19%.
  • Seagate’s revenues grew 4% in fiscal 2018, and are expected to decline by 4% in fiscal 2019.
  • NetApp’s revenues have grown 7% in fiscal 2018, and it is expected to grow 5% in fiscal 2019.

How Much Can Western Digital’s Earnings Decline Based On The Expected Revenue Trends Above?

  • Western Digital’s full fiscal 2019 earnings will likely be $4.91 per share, reflecting a 67% decline over the prior year.
  • Earnings decline can be attributed to lower revenues, and an expected decline in margins, as the company faces pricing headwinds for some of its products.
  • Flash products saw a sequential average selling price per gigabyte decline of 23% in Q3 of fiscal 2019. While the company expects the fall in pricing to moderate, the pricing headwinds could continue in the near term.

What Is Western Digital’s Share Price Estimate Based On the Above?

  • Western Digital’s share price is estimated to be $52 based on a 10.5x price to earnings multiple, and earnings of $4.91 per share in fiscal 2019.
  • The multiple for Western Digital compares with that of 16x for NetApp and 12x for Seagate.

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