I have been lurking around this thread since 11/07, after WDC took a $6 tumble. I picked up a small position at 23+13/16, and of course, was little early. My rationale was that I was picking up a good company at low prices. I was so excited at the chance, I didn't even do sufficient research. Bad move! Now that all the hypsters, flamers, and jerks have disappeared, and the thread seems to be dying, I think its a good time to give my opinion to those that are interested.
Technicals - I'm not really an expert, but here's the deal. WDC is down over 50% for the last 31 trading days, and 72% from its high. The 31 day moving average (MA) sits at 20.15. We've basically broken thru all support, and the next is at around $11/$12 from middle of third quarter last year. Stochastics are 39.47/32.73. The downtrend is still evident. Based on these factors, the view is mostly negative.
Fundamentals - WDC is a good value. P/B = 1.9; LTM P/E = 4.9; LT growth estimates = 19.8%; but current fiscal year P/E = 48.2, which represents a drop of 89% in earnings. However, next fiscal year P/E = 12.7, an increase of 281.3% from this fiscal year. *earnings estimates from IBES.* Now, these estimate P/E's mean either that 1) earnings will fall dramatically this fiscal year, but WILL STILL BE POSITIVE, and subsequently, INCREASE SIGNIFICANTLY the following year. 2) analysts have not discounted earnings that far ahead. I happen to be a long term bull in the HDD industry, and therefore subscribe to the former scenario.
I also own and track Innovex (INVX), which provides components to HDD makers like SEG & Yamaha. In July, INVX warned of reduced orders, and potential earnings shortfalls. Then BOOM, every HDD makers tanked. In that same CC, INVX stated it expected (if memory serves) sequential growth for the next fiscal year. INVX seems to have stabilized in price. My point is that component providers may be leading indicators for HDD manufacturers, who along with semis, are harbingers to box makers' performance, etc. If INVX expects good SEQUENTIAL revenue growth, it bodes well for WDC down the road.
Recommendation - You may or may not agree, but fundamentals & technicals seem to lead to similar conclusions. For the next couple of months, I believe WDC will hold steady or fall, but longer term, WDC will move up. I base this on the fact that current Technicals are poor, and fundamentally, the bulk of the earnings growth will occur next fiscal year. Utilize the MA to attempt to gauge the bottom. If the MA appears to be flattening, you should be pretty close to the bottom. Only then, pick up more shares. That's my personal plan.
Concerns - There are three, with the last one really worrying me. 1) Network Computers (NC) will make HDDs obsolete. Hardly! If you decide to store info on a network, the networks will need the storage capacity. Just because you transferred where the info is being stored does not mean the whole industry will be defunct. More importantly, I refuse to believe that users will become so dependent on servers because a) if the server goes down, you can't do squat. can't save, can't retrieve info, no work. b) user's productivity is a function of server quality and number of users. with limited bandwidth at any point in time, more users = slower access. c) you still have to access the server somehow, either via dial-up (for most individuals) or directly. Either way, servers that control (hold) your data controls the pricing; service providers can charge for phone, monthly fees, per megabyte storage fees, what have you. I, for one, would prefer to have access to my own data.
2) Asian slowdown will kill earnings & sales. WDC's foreign sale is minimal, and in fact, their production costs would fall, increasing their margins from the current 6.8% for the LTM. However, the bigger concern is that Asia won't buy computers, and then box makers will reduce orders for HDD. Again, in a couple of months, the new economic policies in Japan & Korea which have been implemented would lead to growth. Any sign of life would lead to greater capital expenditures (albeit far less than before). I realize my argument is not compelling, but IMO, Asia's impact will be somewhat muted.
3) Market tanks, WDC tanks. Well, this is something that really worries me. I wouldn't mind waiting for a near bottom on WDC, and buying more, but not if the market as a whole tanks. I have witnessed weakness in the S&P, and don't have clue what it will do. Unless the market (or even techs in general) shows some strength, everything I've wrttien is moot.
For what its worth... |
