Western Digital (WDC) Stock’s Downside Risk Is Limited, Says Baird

It doesn’t take much to send shares of Western Digital (WDC) higher these days, as today’s response to earnings demonstrates. WDC surged nearly 15% in early trading Friday before retracing toward a 6% gain as of this writing.

The data storage giant reported December quarter (F2Q19) revenue of $4.23 billion and EPS of $1.45, at the low end of the guidance range of $4.2-$4.4 billion and $1.45-$1.65, respectively. However these results were in-line with the average of recently revised estimates. Looking ahead, management expects Mar quarter (F3Q19) revenue of $3.6-$3.8 billion, which is well below consensus estimates of $3.90 billion, and implies about $400 million q/q decline. The decline is attributed to further pricing weakness with NAND flash products and the remaining $100 million attributable to normal seasonal HDD declines.

Baird analyst Tristan Gerra commented, “With a now one-year-old NAND flash downcycle, and a stock close to book value, we feel downside risk is limited even as we believe a trough EPS is still two quarters away. Stock could rapidly rebound on signs of NAND flash stabilization, which would suggest another cycle of gross margin expansion ahead. NAND stabilization will likely be driven by demand elasticity driving content increases, along with end of inventory digestion in data center.”

Gerra reiterates an Outperform rating on WDC shares, while lowering the price target to $50 (from $55), which implies an upside of 17% from current levels. (To watch Gerra’s track record, click here)

RBC’s Amit Daryanani added, “While the March-qtr guide was disappointing, we think there were several positives through the call that provide a framework for WDC starting to achieve a trough in March-qtr before inflecting higher in Jun-qtr and through FY19. Key points 1) comfort around balance sheet and leverage; dividend remains intact (this was a concern into EPS call), 2) its aggressive actions – $800M cost reduction, NAND bit reduction by 10-15% in CY19, and 3) robust product portfolio in CY19 should help share gains in HDD and NVMe (SSD). While we do think there is some risk that demand could degrade further across HDD & NAND, this print and cost reduction efforts appear closer to forming a bottom in March-qtr if not H1.”

Daryanani maintains a Sector Perform rating on WDC, while raising the price target to $46 (from $40). (To watch Daryanani’s track record, click here)

All in all, WDC has drawn optimism mixed with caution when it comes to consensus opinion among sell-side analysts. Out of 23 analysts polled by TipRanks in the last 3 months, 9 are bullish on the stock, 13 remain sidelined, while one is bearish. With a potential upside of 33.5%, the stock’s consensus target price stands at $57.05. (See WDC’s price targets and analyst ratings on TipRanks


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