Western Digital (WDC) Is Our ‘Best COVID-19 Recovery Idea,’ Says 5-Star Analyst


Long term investors of data storage specialist Western Digital (WDC) are used to bouts of volatility. Following the stock’s steep decline in 2018, 2019 saw a bullish 74% increase to the share price. But along with most of the market, 2020 hasn’t painted a pretty picture so far, and Western Digital shares are down nearly 40% year-to-date.

In fact, even compared to peers, Western Digital has underperformed since coronavirus decimated the market. But this is precisely why 5-star Deutsche Bank analyst Sidney Ho calls Western Digital his “favorite COVID recovery idea.”

Ho reiterated a Buy on WDC, along with a $60 price target. The upside from current levels is a solid 57%. (To watch Ho’s track record, click here)

Investors have raised concerns regarding the company’s prospects. These have involved how consumers’ reduced spending power could impact sales of WDC’s products, along with how government mandates in Southeast Asia, where WDC has multiple manufacturing facilities, could impact the supply chain. A highly leveraged balance sheet also appears risky, should the expected improvement in earnings potential not play out.

While agreeing that “consumer-related spending will take a hit in the current environment,” Ho believes “there are a few pockets of strength that seems to be beneficial to WDC.”

A low exposure to smartphone sales is one, and another is the shift to home working and the rise of virtual classes. These events have proved beneficial both in high demand for data center – 35-40% of WDC’s revenue is tied to enterprise, of which the bulk is tethered to data center – and the PC market. Notebooks have fared especially well, driven by a mix of enterprise and personal demand. A further boost is the looming upgrade to game consoles. The new consoles are moving to SSDs, as opposed to the present HDD based platforms, to which WDC no longer ships.

Ho summed up, “In an uncertain environment, we understand investors are especially concerned and skeptical with businesses that are considered commodity and companies that are highly leveraged… At the current valuation of ~5.2x CY21E EPS and ~4.2x EV-to-EBITDA, we view the risk-reward as highly attractive even if there are downside risks to estimates, and when the market starts to recover from the pandemic, we see an outsized reward for owning the shares.”

The majority of the Street agrees with Ho. The data storage specialist’s Strong Buy consensus rating is based on 16 Buys and 3 Holds. The average price target is higher than Ho’s, and at $76.59, could provide upside of 101%. (See Western Digital stock analysis on TipRanks)

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