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?
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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?