Western Digital (WDC) Investors Shouldn’t Lose Hope Just Yet; This Analyst Reiterates Buy

It’s a short and dramatic plunge for Western Digital (WDC). Today, the storage giant shares lost over 20% of their value after reporting a disappointing set of September quarter results, as revenue missed company guidance. More importantly, December guidance was well below Street expectations due to ongoing flash ASP erosion as well as a challenging demand environment.

Despite the earnings miss, Guggenheim analyst Rob Cihra keeps his rating at Buy, while cutting the price target to $110 (from $125), which represents a potential upside of 156% from where the stock is currently trading. (To watch Cihra’s track record, click here)

Cihra commented, “We maintain our BUY since we still see significant ultimate cyclical upside potential, but with our estimate cuts making HDD EPS power look like it drops to ~$4 vs. our prior ~ $6 model, as weakening cloud capex impacts WDC’s highest-price, highest-margin drives. And our SOTP analysis now cycles NAND EPS down from peak of nearly $10 in CY17 to just $3-4 in C19E or >$2 NET of all debt vs. our prior $4. Yet even with this, that SOTP makes HDDs still look worth ~$47 on their own at a 10x cross-cycle P/E and NAND worth $48-70, keeping our price target >$100 for what we expect to be a cycle recovery by 2HCY19E.”

“The extra new pressure is coming from the HDD half of WDC’s business, where the Sep-qtr’s HDD units of just 34mil fell -12%Q/Q and -19%Y/Y, but Y/Y declines look to now go into the mid-20%’s over the next 3 quarters by our estimate. Moreover, although HDD economics have been getting virtually all of their recent support from high-capacity enterprise drives, largely shipping into hyperscale cloud data centers, WDC is now guiding those to drop off for at least the next 2-3 quarters. We expect that to end up a period of digestion, with cloud buyers historically proving lumpy, but having the effect of cutting WDC’s HDD earnings power over the near-term by an annualized ~$2/share,” the analyst added.

TipRanks suggests caution has a slight grip on Wall Street analysts surveying the computer hardware maker. Out of 18 analysts polled in the last 3 months, 7 bet on WDC stock, while 11 hedging their bet. However, With a return potential of nearly 85%, the stock’s consensus target price stands at $78.87. (See WDC’s price targets and analyst ratings on TipRanks)


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