Western Digital Headed Back To Lows?

WDC: Western Digital logo
Western Digital

Despite a 52% rise since the March low of this year, at the current price of around $44 per share we believe Western Digital stock (NASDAQ: WDC) has reached its near term potential. WDC stock has rallied from $29 to $44 off its recent bottom compared to the S&P which moved 39%. On the way down, WDC stock had taken a beating of around 58% going from $69 to $29, a rate much higher than the S&P 500, which fell by about 34%. Further, the stock is still down around 39% from its early 2018 levels, two years ago.

WDC stock has only covered about half the distance to the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Yet, this seems to make it fully valued as, in reality, demand and revenues will likely be much lower than last year.

WDC stock fell over the last 2 years due to a 13% drop in revenue, which combined with a 1.5% decrease in outstanding share count, translated into a 14% drop in revenue per share. Further, the company has seen a drop in profitability, with EPS over this period going from $1.38 in 2017 to -$2.58 in 2019. EPS dropped drastically in 2019, as an oversupply in the memory market led to a 20% drop in revenue, with COGS roughly unchanged. This led to a severe drop in profitability.

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While the company has seen revenue fall 13% over recent years, its P/S multiple has seen a significant decrease of 29%. Further, we believe the stock is unlikely to see significant upside despite the recent rally, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove -39% Change in Western Digital Stock between 2017 and now? has the underlying numbers.

Western Digital’s P/S multiple was at 1.1x in both 2017 and 2019. While the company’s P/S is currently a lower 0.8x, there is further downside when the current P/S is compared to levels seen in the past years: P/S of 0.5x at the end of 2018, for example.

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

The global spread of Coronavirus has meant there is much lower demand for new laptops and computers, which would drive down demand for internal memory devices. Further, the convenience of cloud storage and streaming platforms has been steadily driving down demand for external memory storage as well, and the current crisis will only aggravate that. In addition, there have likely been supply disruptions in China and elsewhere from the global Coronavirus crisis. We believe WDC’s Q4 results in August will confirm the hit to its revenue. It is also likely to accompany a lower H1 2021 guidance.

If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/S decline from the current level of 0.8x to around 0.6x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $30.

For more insights into how the Covid-19 crisis could impact Western Digital’s memory peer Seagate, view our interactive dashboard Seagate Downside: How Low Can Seagate Stock Go?.

Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here


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