Strong Upside Potential For Western Digital Stock?

WDC: Western Digital logo
Western Digital

We believe Western Digital stock (NASDAQ: WDC) has the potential for strong gains once fears surrounding the Covid outbreak are put to rest. Western Digital trades at $36 currently and has lost 41% in value so far this year. Further, it traded at a pre-Covid high of $69 in February, and currently trades at around 47% lower than that level. Despite the pandemic, WDC’s full year 2020 results (fiscal year ending June) saw revenue come in at $16.7 billion vs $16.6 billion in 2019. A drop in SG&A expenses saw net loss decrease to $250 million, only a third of the $750 million in net loss for 2019. Further, since WDC stock has gained only 25% from its March low of $29 compared to the S&P 500 which has gained 50%, we believe that the stock has the potential to rise almost 90% to its pre-Covid level once there is clear evidence of containment of the virus. Our conclusion is based on our detailed analysis of Western Digital’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 49% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
Relevant Articles
  1. Why Has Western Digital Stock Underperformed The S&P Since 2017?
  2. Western Digital Stock Has Outperformed The S&P Since 2018 Despite A Drop In Sales
  3. After Rough Month, Can Western Digital Stock Turn Things Around?
  4. Why Has Western Digital Stock Underperformed Despite Revenue Growth?
  5. Forecast Of The Day: Western Digital’s Client Solutions Revenue
  6. Turnaround In Financials To Drive Western Digital Stock Higher

In contrast, here’s how WDC and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Western Digital vs S&P 500 Performance Over 2007-08 Financial Crisis

WDC stock declined from levels of around $20 in September 2007 (pre-crisis peak) to levels of around $11 in March 2009 (as the markets bottomed out), implying WDC stock lost 46% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $35 in early 2010, rising by a staggering 223% between March 2009 and January 2010.

Western Digital’s Fundamentals in Recent Years Look Strong

Western Digital’s revenue grew 28% from $13 billion in 2016 to $16.7 billion in 2020, primarily led by growing NAND flash drive sales. With the strong growth in revenues, the company’s margins also expanded till 2018, resulting in EPS rising from $1.01 in 2016 to $2.27 in 2018. The supply glut in 2019, led to a drop in selling prices, and with COGS remaining at the same level, EPS dropped to -$2.58. EPS recovered to -$0.84 in 2020 despite the pandemic leading to only marginal revenue growth. 

Does Western Digital Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Western Digital’s total debt decreased from $13.2 billion in 2017 to $9.6 billion in 2020. However, Western Digital’s total cash also decreased from $6.4 billion to $3 billion over the same period. Further, the company generated $800 million in cash from its operations in 2020, and it appears to be in a decent position to weather the crisis.


Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

As investors focus their attention on expected 1H 2021 results, we believe Western Digital stock has the potential for strong gains once fears surrounding the Covid outbreak are put to rest.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.


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