Western Digital Stock Headed Below $30 For The First Time Since 2011?

Despite a steep 37% decline in Western Digital’s stock (NASDAQ: WDC) since the beginning of this year, as the spread of the novel Coronavirus rattled the stock markets and the broader economy, at the current price of $39 per share, we believe the worst may not be over for Western Digital. The key is that Western Digital’s stock is still higher than the $35 levels seen in late-2018. We further estimate that WDC’s stock price could decline to levels of around $27 (worst-case scenario) if its revenues fall by 20% vs. FY’19, and its valuation multiple drops to 0.6x, a little over the 2018 low of 0.5x. Below, we summarize this possible downside case for WDC, which is detailed in our interactive dashboard analysis Western Digital Downside: How Low Can Western Digital Stock Go?

So what’s the likely trigger and timing to this downside?

• The global spread of coronavirus has led to slowdown in industrial and economic activity, thus affecting consumer spending power. Lower consumption will lead to lower demand for laptops and computers, leading to lower demand for external and internal memory devices. This would lead to a drop in demand for WDC’s memory products. We believe Western Digital’s Q4 ’20 results in July will confirm the hit to its revenue, with the management having already warned that the next few quarters will be difficult.
• Specifically, we believe the full-year revenue expectations formed by the market may be closer to $13.3 billion, about 20% lower than its 2019 revenue of $16.6 billion, and nearly 35% lower than the 2018 revenue of $20.6 billion.
• The market has seen this coming, and WDC’s P/S multiple, which has already shrunk to around 0.7x, could likely drop to 0.6x, which would still be slightly higher than the 2018 low of 0.5x.
• This, in turn, would translate into a stock price drop of over 30%, close to $27.

Will such a drop be justified? Absolutely not. However, investors who are first out the door in a panic selling situation take a smaller hit to their portfolio.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

We do believe these trends are likely to reverse in later quarters of 2020, and as the Coronavirus crisis is tamed during late Q2, higher revenue and earnings expectations will replace the dire scenarios that are easily imagined during difficult times.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. It complements our analyses of the coronavirus outbreak’s impact on a diverse set of companies. The complete set of coronavirus impact and timing analyses is available here.

You can see how COVID-19 could affect WDC’s computing peripherals’ peer Seagate, in our dashboard Seagate Downside: How Low Can Seagate Go?

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