What’s Up With Western Digital- Revenue Up 30%, But Stock Down The Same Amount?

Western Digital stock (NASDAQ: WDC) is roughly unchanged over the past 3 years, with the stock price rising only marginally from $61 at the end of 2016 to about $62 at the end of 2019. Furthermore, dropping to $43 so far in 2020 due to the COVID-19 pandemic, the stock has registered a cumulative return of -30% between 2016 and May 2020.

But how did this happen despite WDC revenue up 28% from 2016 to 2019? Well, there is a good reason – it’s because of earnings, the profits earned after all the expenses and taxes. Turns out Western Digital’s earnings margins (profits as a % of revenue) dipped over the last few years from 1.9% in 2016 to -4.6% in 2019.

So how did WDC’s margins contract like that? You can find a detailed analysis in our interactive dashboard Why Is There A Mismatch In The Rate At Which Western Digital’s Revenues And Stock Price Have Changed?

The semiconductor supply glut in 2019 has been the key factor behind this drop in margins for WDC. Western Digital’s sales took a big hit in 2019, dropping to $16.57 billion, from $20.64 billion in 2018. This was largely due to an oversupply in the semiconductor and memory market, with demand staying low due to a drop in sales for computing devices. This sudden drop in demand took a toll on WDC’s gross profit, with cost of goods sold (COGS) in 2019 coming in at the same level as that in 2018, while revenue dropped 20%. This dragged down WDC’s overall profitability, with net margins dropping from 3.3% in 2018 to -4.6% in 2019. EPS dropped from $2.27 to -$2.58 over this period. Here is a detailed picture of how Western Digital’s margins contracted.

The combination of these factors: margins falling from 1.9% in 2016 to -4.6% in 2019, while revenue grew by 28% from $13 billion in 2016 to $16.6 billion in 2019, meant earnings per share (EPS) in fact dropped from $1.01 in 2016 to $-2.58 in 2019.

Further, so far in 2020, WDC stock has dropped from $62 to $43 on the back of lower investor confidence, owing to the negative impact COVID-19 could have on the company. Given that streaming services and cloud storage are already eating into the portable memory market, a further drop in demand due to the pandemic, is the last thing WDC needs. The waning faith in the company can be gauged from its price-to-sales multiple which has dropped from 1.2x in 2016 to around 1x in 2019, and now stands at 0.8x.

To find out how COVID-19 could impact Western Digital’s memory peer Seagate, view our interactive dashboard Seagate Downside: How Low Can Seagate Stock Go?

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