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Don’t Bite Into the Cheap Western Digital Stock Price

Josh Enomoto

The October meltdown took virtually all sectors down with it. However, some felt the pain more than others. As a company levered toward the volatile flash-memory industry, Western Digital (NASDAQ:WDC) is a tricky proposition in the best of circumstances. Unfortunately, last year was particularly ugly for WDC stock.

For the first few months, shares held some promise. By early summer, though, the wheels started to fall off. The cyclical nature of memory chips that previously boosted Western Digital stock reared its ugly head in 2018. Perhaps the only consolation prize is that competitors Seagate Technology (NASDAQ:STX) and Micron Technology (NASDAQ:MU) suffered similar disappointments.

But one of the biggest headwinds that disrupted WDC stock is the ongoing trade war with China. As the world’s second-biggest economy, any negativity in China will roll over to the international community. More critically, the Chinese represent a rabid consumer base for all things technology.

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Based on the current political environment, substantive progress on the issue may not come soon. That uncertainty has further unsettled Western Digital stock. Keep in mind that the company’s SanDisk acquisition raised some eyebrows due to potential Chinese influence on the deal. In short, WDC faces significant pressures unless we normalize U.S.-China relations.

Another factor that weighs heavily on the semiconductor firm is fading credibility. Western Digital disclosed softening demand in mobile and PC sales. Adding to the frustration, management consistently downgraded guidance.

As our own Vince Martin warned, WDC stock appears like an undervalued play. However, the bearishness isn’t completely unjustified. Martin pointed out that the company’s earnings aren’t sustainable, and hindsight has proven him correct.

But that was back in mid-September of last year. With a new year, has the narrative changed for Western Digital stock?

Earnings Disaster Shed Credibility for WDC Stock

Whenever a household brand name suffers a cataclysmic drop, a temptation exists to assume the worst is baked in. I’m guilty of this thinking process like anyone else. But if we’re being intellectually honest, WDC stock has lost plenty of credibility.

At a time when management needed to spark momentum, its second-quarter fiscal 2019 earnings report did the opposite. Analysts’ consensus target for earnings-per-share called for $1.51. Instead, the company could only muster $1.45, or a 4% miss.

As InvestorPlace writer Karl Utermohlen pointed out, this “haul” was a massive fall from grace from the year-ago quarter. At that time, WDC delivered an EPS of $3.95. With such a steep downgrade, the Street at minimum expected to break even with consensus.

Even more startling, the revenue picture confirmed the bearish thesis. Analysts expected the tech firm to ring up $4.25 billion in sales. But Western Digital meekly offered only $4.23 billion.

Normally, a half-percent miss isn’t cause for alarm. However, the company delivered $5.34 billion in Q2 2018 or nearly a 21% year-over-year miss.

CEO Steve Milligan explained the actuals-to-forecast deficit as resultant from “a softening business environment.” No kidding. While my speculative side wants to jump onboard Western Digital stock, I think the company faces further pain.

That’s because the NAND memory market — WDC’s specialty — has no light at the end of the tunnel. The headwinds that the industry worried about a month ago have either remained the same or worsened: oversupply and low demand due to the China trade war.

Plus, we’ve reached peak smartphone, and the problem may continue to erode. Recently, Apple’s (NASDAQ:AAPL) flagship iPhone sales severely disappointed analysts.


A Contrarian Trade for Western Digital Stock?

With all the bad news working against WDC stock, you’d expect shares to tumble during extended hours. Indeed, it did just that after the earnings disclosure, but only temporarily. After the smoke cleared, shares jumped over 9%.

That made me wonder if I’m missing something in my assessment of the company. I’m not sure what to make of it other than a derivation of the bad-news-is-good-news argument.

Technically, you can make the case that Western Digital stock hit a long-term support line. Recall that shares hemorrhaged badly into the middle of 2016 before climbing back up. As some folks pointed out, perhaps the worst is over.

I can see the company moving purely on contrarian emotions. However, we’ve got to be realistic: almost every fundamental factor suggests increasing pressure. Certainly, I don’t see much in the way of positive catalysts.

Bottom line, we’ve passed a few months since Martin wrote his piece about WDC stock. He ultimately warned that better opportunities existed. He was proven right back then, and I think it’s still the same story today.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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