On Tuesday analysts at Citi updated their outlook on Western Digital, highlighting the positive shift in the solid-state drive (SSD) market. As per Citi’s revised forecast, SSD revenue is expected to surge by 129% year-over-year, a significant increase from the prior estimate of 83%.
This optimistic outlook is underpinned by data from TrendFocus, which highlighted better-than-expected shipment growth and an increase in NAND price per gigabyte.
This forecast extends into 2025, where SSD revenues are now expected to grow by 40% year-over-year, sharply up from a prior projection of just 0.4%.
Citi analysts maintain a bullish stance on Western Digital, reiterating their Buy rating with a $95 price target, suggesting a potential 54% upside from the current trading levels.
Western Digital Q2 earnings: Analyst reactions
Western Digital’s Q2 earnings release elicited mixed reactions from analysts. Summit Insights downgraded the stock to Hold, citing limited near-term improvements in profitability, despite consistent growth in average selling prices (ASPs) and gross margin expansion over recent quarters.
Conversely, Citi Research upheld its Buy rating, emphasizing the cyclical recovery in the storage industry and improved margins in a capacity-constrained environment.
Bank of America Securities echoed this sentiment, noting strong margins in the HDD segment and maintaining a price objective of $89.
Western Digital reported robust Q2 2024 results, with revenue reaching $3.76 billion, a 41% year-over-year increase, exceeding consensus estimates.
This growth was largely fueled by the Cloud segment, which saw an 89% year-over-year increase to $1.88 billion, driven by higher nearline shipments and increased enterprise SSD bit shipments.
The Client segment also contributed, albeit modestly, with a 3% sequential increase due to higher flash ASPs. However, the Consumer segment saw a 7% decline quarter-over-quarter, reflecting a weaker demand environment in that market.
Higher enterprise SSD demand
Western Digital’s business fundamentals are shaped by a strong presence in both the HDD and Flash memory markets. The company’s Cloud segment, now representing 50% of total revenue, is a key growth driver, benefiting from the ongoing digital transformation and the rise of AI-driven data needs.
Higher demand for enterprise SSDs and nearline HDDs is expected to continue as data centers expand their infrastructure.
The Client segment, which accounts for 32% of revenue, also shows promise, with improving flash ASPs and stable demand for high-performance storage solutions. However, the Consumer segment’s outlook remains subdued due to declining shipments, though partially offset by better pricing.
The primary growth driver for Western Digital lies in its exposure to the expanding Cloud market, where demand for higher capacity and performance is pushing up both volumes and prices.
The company’s strategic focus on AI-related storage needs positions it well to capitalize on this trend.
However, headwinds persist, particularly in the Consumer segment, where lower bit shipments reflect a more cautious consumer spending environment.
Additionally, the broader memory market remains susceptible to fluctuations in demand and pricing, which could impact profitability if the current supply-demand balance shifts.
Western Digital’s strategic spin-off
Western Digital’s decision to spin off its Flash memory business into a separate entity is seen as a strategic move to enhance operational efficiency and capital allocation.
The spin-off is expected to simplify the business structure, allowing each segment to pursue growth opportunities more effectively.
Additionally, this move aligns with the company’s broader strategy to capitalize on its leading position in the HDD market, where it holds a significant market share.
The partnership with Kioxia, which will continue post-spin-off, provides Western Digital with a steady supply of NAND wafers, crucial for maintaining its competitive edge in the SSD market.
The profitability of Western Digital’s HDD segment is expected to improve post-spin-off, driven by higher ASPs and the growing adoption of SMR-based drives in the Cloud segment.
These drives, designed to meet the increasing data storage needs of enterprise customers, offer better margins compared to traditional HDDs.
Western Digital valuation
Western Digital’s current trading multiples suggest that the stock is undervalued relative to its peers. The company’s forward P/E ratio stands at 8x, making it cheaper than competitors like Micron and Intel.
This discount appears unwarranted, given the company’s strong earnings trajectory and positive outlook for FY25.
Analysts believe that the market has not fully priced in the potential benefits from Western Digital’s planned spin-off of its Flash memory business, which could unlock significant shareholder value by creating a more focused and streamlined organization.
Western Digital’s recent dip presents an intriguing buying opportunity, particularly given the positive outlook from analysts like those at Citi and the company’s solid Q2 performance. However, as with any investment, risks remain, particularly in the cyclical and highly competitive memory market.
With a strong fundamental backdrop, it’s now time to turn our attention to the technical indicators to better understand the stock’s price trajectory and identify potential entry and exit points. Let’s see what the charts have to say about Western Digital’s stock performance.
Decade-long downtrend continues
Western Digital’s stock has been in a long-term downtrend for more than a decade now. It seemed that this downtrend had ended when the stock doubled in the period between October 2023 and June this year, but the recent decline seems to suggest it is still in place.
Source: TradingView
Considering that investors who want to place bullish bets on the stock must exercise caution. A long position should only be considered if the stock manages to give a daily closing above its 200-day moving average, which currently lies around $71.2.
Traders who are bearish on the stock have a low-risk entry on their hands right now as the stock is facing strong resistance around $65.8 in the short-term charts. They can initiate a short position at current levels with a stop loss above $66.
If the bearish momentum resumes in the short term, the stock can again fall to its recent swing low near $53 where one can book profits.
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