Article about why WDC has fallen to ridiculous levels and comments about Seagate and Micron. There are some charts and tables in the link that the editor didn't want to carry over into this post.
Link: seekingalpha.com
Why Western Digital Corporation Stock Plunged After Earnings
May 3, 2018 2:42 AM ET
|
About: Western Digital Corporation (WDC), Includes: MU, STX
Chris Lau
Contrarian, event-driven, tech, oil & gas
Summary
Western Digital reported a strong quarter and raised its profitability outlook.
Stock closed at 52-week lows on heavy selling volume.
Competitor Seagate Technology fared better after its ER yet its stock is richly valued at 25 times compared to 13 times for Western Digital.
This idea was discussed in more depth with members of my private investing community, DIY Value Investing.
Despite the insistence from management that the demand for cloud storage is insatiable and will continue growing, Western Digital ( WDC) stock plunged over 10 percent in the last week alone. It is now down 28 percent from 52-week highs and is valued at depressed multiples. Its P/E sits at 13 times and the forward P/E is 5.7 times. Even its competitor, Seagate Technology plc ( STX) did not fall by that much after its earnings report. Seagate’s P/E is higher, too at 25 times. If valuation multiples do not explain what happened to WDC stock, what will?
Western Digital earned $3.63 a share on revenue that grew 7.5 percent year-on-year to $5 billion. The company reported healthy operating cash flow and gross margin (non-GAAP) of 43 percent. Macroeconomic conditions were positive, giving cloud computing and mobility-related markets a lift. NAND flash product strength continued in the March quarter. Management cited AI, machine learning, and IoT as long-term positive catalysts that will keep driving data demands. It expects connected devices will top 75 billion units by 2025, up from 9 billion today. With such incredible growth in the decade ahead, why are markets turning sour on the stock? Short float sits at just 2.75 percent, compared to 8 percent with Seagate’s stock.
Western Digital fell on the markets after its earnings report while Seagate's stock fell by less:
<chart>
Headwinds in Demand for NAND FlashWDC faced some “normalizing” for NAND pricing, which is expected as the product matures. 64-layer 3D NAND makes up much of its products but the company is ramping up 96-layer technology in 2018. The unit sale from Toshiba to WDC will close. But investors cannot ignore the negative pressures on the Flash market in 2018, even though management forecasts supply constraints through to the second half of this year.
The hint of headwinds in NAND markets may also explain the underperformance in Micron Technology ( MU), a stock I also cover in the DIY (do-it-yourself) service as a deep value stock idea. Just as the single-digit P/E multiples do not justify a discount on WDC stock, the same applies to Micron. MU stock trades at a 5.5 times P/E and sub-5 times forward P/E. Investors in Micron may need to wait until later next month when the company reports earnings. Trouncing analyst estimates and raising its guidance might finally send Micron back to the $50 - $60 range.
Predicting that Micron will not stay below $50 for much longer remains to be seen ( forecast posted here). Western Digital’s selloff is another matter. On March 13, I forecast 20 percent more upside in WDC stock (accessible only to DIY marketplace members or PRO subscribers).
Why did the stock follow-through by peaking at above $105 and closing at $75.66 on May 2? The company will ship storage at record-level exabytes, expand its product portfolio and will grow its cash holdings from $5.1 billion. After raising its long-term gross margin from 33 percent – 38 percent to 40 percent or more, the company is well-positioned to apply the increasing cash flow to pay down debt.
In the March quarter, interest expenses totaled $157 million, lower than the previous year due to refinancing. The company also cut debt by $825 million, again due to capital restructuring activities. Its total debt at the end of the third quarter was $11.4 billion.
Increasing Shareholder ReturnsWDC may not be in a good position at this time to buy back shares to increase shareholder returns. It is authorized to buy up to 2.1 billion shares but is better off paring its debt. Interest rates may rise up to four times in total this year and 2 – 3 more times next year. But with the stock falling so quickly, management may want to re-think buying back more shares at current levels. Near-term headwinds in the normalizing of Flash pricing created investor unease, temporarily hurting the stock price. By later this year, pricing will either stay the same or go up as the demand cycle for storage resumes.
In 2019, a production ramp for MAMR (microwave-assisted magnetic recording) technology will likely get its investors excited about the company’s prospects again.
Western Digital’s drop to a new 52-week low appears unjustified and irrational. The stock has a fair value of well-above $100 - $120 a share, using a 5-year DCF revenue exit model. Here, the assumption of revenue growth in the single-digits is enough to arrive at that fair value.
Western Digital is not yet a DIY marketplace subscription idea but could make the list if the stock continues to fall.
Please [+]Follow me for value stocks on sale. Click on the big "follow" button beside my my avatar.
This DIY idea originates from the DIY Value Investing marketplace service. Join now and get a 10 percent off 'welcome' discount.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
*************************************************************************************************************************
UWG |
