| | | Buy Western Digital Stock, Analyst Says. Kioxia's IPO Will Show Its True Valuation. -- Barrons.com
DOW JONES & COMPANY, INC. 2:52 PM ET 9/21/2020
Symbol Last Price Change | WDC | 35.84 | -1.37 (-3.6818%) | | TOSBF | 28.2635 | 0 (0%) | | STX | 47.9 | -0.92 (-1.8845%) | | QUOTES AS OF 02:52:43 PM ET 09/21/2020 |
Western Digital (WDC) shares should be a major beneficiary of the coming initial public offering for Kioxia, a new name for what used to be the Toshiba(TOSBF) flash-memory chip business.
Kioxia is expected to go public on the Tokyo Stock Exchange on Oct. 6, in what will be the largest IPO year to date in Japan. The stock is on track to make its debut with a valuation of about $14 billion to $18 billion.
The Kioxia situation is of keen interest to Western Digital(WDC) investors. For one thing, the deal strengthens a key ally -- the two companies have extensive joint flash-memory operations. More significantly, the reception for the Kioxia deal in the public market will underline what appears to be the seriously underpriced stock in Western Digital(WDC).
Deutsche Bank analyst Sidney Ho notes that if you assume Western Digital's(WDC) hard-disk drive business should be valued similarly to rival Seagate(STX), that segment should be valued at about $18 billion. Western has a market cap of about $11.2 billion, and an enterprise value, if you include its outstanding debt, of about $21 billion. That implies a $3 billion value for Western's flash-memory business. But Ho contends that there appears to be "a large valuation discrepancy" between Kioxia and Western's own flash business.
Under terms of their joint venture arrangement, the two companies share the flash-memory output from Kioxia's chip factories. Ho's point is that the expected pending valuation of Kioxia implies Western Digital's(WDC) half of their joint flash-memory operations is undervalued by as much as $10 billion.
"There could be reasons why Western Digital(WDC) is not being valued at the full sum-of-the-parts price of Seagate(STX) and the soon-to-be public Kioxia, including a common discount given to sum-of-the-parts analysis and differences in operations, go-to-market strategy, and assets owned by Western Digital(WDC) and Kioxia," he writes. "However, we do not think that these reasons justify the $10 billion-plus discount that Western Digital's(WDC) flash memory business is currently being valued at compared to Kioxia, and we believe Kioxia's IPO will re-establish the basis for valuing Western's flash memory business."
Ho repeated his Buy rating and $48 price target on Western Digital(WDC) shares, while setting a "catalyst call" Buy recommendation on the stock.
Western Digital (WDC) shares, caught up in a broad selloff, were down 3.2%, to $36.03 Monday afternoon. The Dow Jones Industrial Average was down 3%.
Write to Eric J. Savitz at eric.savitz@barrons.com |
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