Should You Pick Western Digital Stock At $65 After 25% Gains This Year?

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WDC
Western Digital

Western Digital (NASDAQ: WDC) recently provided an update on its plan to split the company into two verticals – hard drive and NAND business. The current CEO of Western Digital – David Goeckeler  – will head the NAND flash memory spinoff company, while Irving Tan, currently executive vice president of global operations, will assume the leadership role for the standalone hard disk company. The spinoff is expected to be completed in the second half of this year, and it is largely seen as positive for the company.

The company also reported upbeat Q2’24 results (the fiscal ends in June) in late January, with revenue of $3.0 billion and a loss of $0.69 per share, compared to the consensus estimate of $3.0 billion in sales and a loss of $1.13 per share. WDC stock has surged over 25% this year amid its restructuring plans as well as Q2 earnings beat.

Looking at WDC’s stock performance over a slightly longer term, WDC stock has witnessed gains of 20% from levels of $55 in early January 2021 to around $65 now, vs. an increase of about 35% for the S&P 500 over this roughly three-year period. However, the increase in WDC stock has been far from consistent. Returns for the stock were 18% in 2021, -52% in 2022, and 66% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that WDC underperformed the S&P in 2021 and 2022.

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In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could WDC face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump? From a valuation perspective, we think WDC is appropriately priced. We estimate Western Digital’s valuation to be $64 per share, aligning with its current market price. At its current levels, WDC stock is trading at 1.8x sales, compared to the 1.1x average value over the last five years. An uptick in valuation multiple seems justified with the company’s restructuring plans and expected pickup in sales after a meaningful fall in fiscal 2023, amid significant storage price erosion and reduced purchases by enterprise customers.

Western Digital’s revenue of $3.0 billion in Q2 was down 2% y-o-y, as a 13% fall in Cloud revenues more than offset 3% gains for Client and 6% rise in Consumer sales. However, Cloud revenues were up a solid 23% sequentially, driven by increased shipments and pricing gains. The company’s adjusted gross margin fell by 190 bps (y-o-y) to 15.5% during the quarter. Lower revenues and margin contraction resulted in a loss of $0.69 per share, versus the loss of $0.42 per share in the prior-year quarter. Looking forward, Western Digital expects revenues to be in the range of $3.2 billion and $3.4 billion in Q3’24. It also expects sequential improvement in gross margin and bottom line to be in the range of $(0.10) and $0.20 on an adjusted basis.

Overall, Western Digital appears to be on the right track, with a recovery in sales and earnings in sight. While much of the positives appears to be priced in, WDC stock may remain volatile in the near term, reacting to demand and storage pricing trends, as well as updates related to the spin-off of the NAND business.

While WDC stock looks appropriately priced, it is helpful to see how Western Digital’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Returns Mar 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 WDC Return 8% 23% -5%
 S&P 500 Return 1% 8% 130%
 Trefis Reinforced Value Portfolio 1% 6% 650%

[1] Returns as of 3/8/2024
[2] Cumulative total returns since the end of 2016

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