Insights

Why Western Digital Fell Today

What happened

Shares of hard disk drive (HDD) and NAND flash producer Western Digital (NASDAQ: WDC) fell today, down 5.8% as of 3:13 p.m. ET.

Western Digital reported earnings yesterday after market close. While the company’s bottom line beat estimates, revenue came up short. Additionally, management forecast sharp declines for the current quarter that were well below analyst expectations. Finally, some may have been disappointed in management’s noncommittal to a recent activist investor proposal.

So what

In its fiscal fourth quarter, Western Digital reported revenue of $4.53 billion, down 8% from the prior year, as well as non-GAAP (adjusted) earnings per share of $1.78, down 18%. That profit result actually came in ahead of analyst expectations, even as revenue fell short.

As has been the case with so many chip-related companies, the company’s sales to cloud customers remain quite strong, up 5% year over year, but the client and consumer device end markets were down, falling 14% and 23%, respectively.

However, guidance for the current quarter was very, very weak, with revenue projected to fall to $3.7 billion and adjusted earnings per share to just $0.50 at the midpoints of the guidance range. Management noted that PC makers are rightsizing their inventory amid near-term demand weakness, but it also expects the PC market to eventually recover next year, due to the new hybrid work paradigm established after the pandemic. Management also noted that cloud demand continues to remain strong.

Also on the conference call with analysts, management addressed the recent proposal from activist hedge fund Elliott Management to split the company’s HDD and flash businesses into two companies. CEO David Goeckeler said:

The executive committee of the board, which I lead, continues to oversee the review, and Elliott Management is participating alongside us under a nondisclosure agreement, along with other interested parties. We’re evaluating a range of alternatives, including options for separating our market-leading flash and HDD franchises. We are moving expeditiously, but this work will take time.

Now what

It was a bad day for Western Digital, which has underperformed its peers over the years and now delivered another frustrating quarter. However, with the stock trading at just five times next year’s estimates, as well as the potential for the splitting of the business this year, Western Digital looks like an interesting option for value investors looking for specific catalysts that could unlock value.

Of course, if you think the broader tech sector is undervalued after this year’s swoon, it may be better to invest in higher-quality chip stocks with more stable profitability that now trade at compelling valuations. Western Digital’s HDD business is stable and profitable, but not very high growth. Meanwhile, it has been difficult for flash producers to make much money amid oversupply and price wars.

Therefore, while Western Digital is cheap and could be compelling if it adopts the Elliott proposal, some of its peers would be better options if you think tech stocks are going to continue to recover. Thus, the catalyst-driven Western Digital may be more or less attractive depending on how attractive you think alternatives are today.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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