Up 1.8x Since March, Western Digital Stock’s Run Is Far From Over!

by Trefis Team
+42.36%
Upside
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Market
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Trefis
WDC
Western Digital
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Up 80% since March, we believe Western Digital stock (NASDAQ: WDC) has further room for more than 30% upside to levels around its pre-Covid high. The company develops and sells hard drives and other storage products, like flash memory and cloud and data center storage services. The company’s stock trades at $53 currently and is, in fact, down almost 20% since the start of 2020. It traded at $70 in February 2020 – just before the outbreak of coronavirus – and is currently almost 25% below that level, as well. Further, with the storage demand rising steadily since the pandemic, demand for the company’s products will rise in the near to medium term, and the stock has the potential to gain  around 30% to its pre-Covid levels. Our conclusion is based on our comparative analysis of WDC stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.

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
  • Since 3/24/2020: S&P 500 recovers 67% 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.

In contrast, here is how WDC stock and the broader market fared during the 2007-08 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
  • 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

WDC and S&P 500 Performance Over 2007-08 Financial Crisis

We see WDC stock declined from levels of around $26 in September 2008 (pre-crisis peak) to levels of around $14 in March 2009 (as the markets bottomed out), implying WDC stock lost almost 50% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to $44 in early 2010, rising more than 3x between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

WDC Fundamentals Over Recent Years

WDC revenues decreased from $19.1 billion in 2017 to $16.7 billion in 2020 (WDC’s fiscal year ends in June), primarily due to a drop in the price per bit, which usually trends downward for the memory segment. Along with lower revenue, earnings also decreased from $1.38 to -$0.84 during this period.

Does WDC Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

WDC’s total debt dropped from $13.2 billion in 2017 to $9,6 billion in 2020, while its total cash decreased from around $6.4 billion to $3 billion over the same period. Further, the company generated around $800 million cash from operations in fiscal 2020. This strong cash position combined with steady cash from operations provides the company a reasonable cushion to deal with the current crisis.

Conclusion

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-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment

With the recent surge in the number of new Covid-19 cases in the U.S., we see the work from home trend continuing in the near term, driving up demand for both physical and cloud storage.. We believe that Western Digital stock has strong upside potential in the near term, and even as the lockdowns are gradually lifted, a drop in memory demand does not seem very likely. This could see WDC stock potentially rise more than 30% from its current level.

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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