Why Is Western Digital’s Stock Up 60% In 2019, Despite A Memory Supply Glut?

Western Digital Corporation (NASDAQ: WDC) is a leading manufacturer and developer of storage devices, flash storage, networking equipment, and home entertainment products. 2019 has been a great year for WDC so far, with its stock up more than 60%, despite a drop in revenue and the ongoing NAND supply glut.

In this dashboard, Why is Western Digital’s stock up 60% already this year?, we analyze the factors behind this price rise.

Growth In Data Center Devices & Solutions Revenue, Despite A Drop In Total Revenue

• Data center devices & solutions segment is responsible for the sale of costlier, enterprise-grade hard drives, as well as solid state drives that are used in data centers as well as for cloud-based storage.
• Revenue from this segment is up from $1.07 billion in Q2 ’19 to $1.27 billion in Q4 ’19, whereas total revenue dropped from $4.23 billion to $3.63 billion over the same period.
• Enterprise demand for HDDs remains rock solid, but a drop in NAND flash prices means that a few enterprises are making the shift to cheaper flash storage, and this has added to revenues from this segment.

Hard Disk Drive Revenue Still Going Strong, Alongside Slower Declines In Flash Revenue

• The NAND supply glut has affected flash revenues, which have dropped from $2.17 billion in Q2 ’19 to $1.51 billion in Q4 ’19, on the back of weaker retail flash demand, and a drop in flash selling prices.
• However, HDD revenues have risen over the same period, from $2.06 billion to $2.13 billion.
• Another positive came on May 30th, 2019, when major NAND semiconductor manufacturer Micron announced its Q3 ’19 results, claiming signs of NAND demand improvement, and announcing plans to reduce their CapEx in 2020 to help balance industry supply-demand.

The Trend in Total Exabytes Sold

• Total exabytes (1 exabyte=1 billion gigabytes) shipped dropped in Q2 ’19 by about 15% QoQ, amidst increased pressure on demand.
• However, Q3 and Q4 ’19 saw a turnaround, with a 11-12% QoQ growth in exabytes shipped for both quarters.
• Even with the ongoing pressure on NAND demand, flash exabytes saw just a 5% drop in Q3 ’19 and a 1% drop in Q4 ’19, which suggests that things are improving.
• This has largely been due to fresh enterprise demand for flash storage, which seems to be making up for some of the retail demand loss.
• Amidst this, in mid-June WDC reported a power outage at one of its flash manufacturing facilities in the Yokkaichi region in Japan, which is expected to hamper flash storage output in Q1 ’20.
• The company expects a 6 exabytes hit to capacity produced, which is around 8-10% of quarterly exabyte numbers.
• This bad news was taken as a positive in helping ease the supply glut in the NAND flash market, and has further helped the stock’s cause.

An improvement in Net Margins in Q4 ’19

• After reporting net margins of -11.5% in Q2 ’19 and -15.8% in Q3 ’19, the company finally saw a drop in costs, in an attempt to weather the demand slump for memory products.
• Even though total revenue dropped from $4.23 billion in Q2 ’19 to $3.63 billion in Q4 ’19, net margins have improved from -11.5% to -5.4% over the same period.

The P/S multiple has seen a decent rise over the past one year

• The P/S multiple has grown from 0.85 in 2018 to 1.13 in 2019, a 33% increase.
• All the above factors have helped ease the demand-supply issues in the memory market, and things are expected to get better for memory companies overall.
• This has created a positive outlook around WDC, and investors are willing to pay more per dollar of company revenue.

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