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Western Digital Stock Falls Following Analyst Rating Downgrade

Zacks Equity Research

Western Digital Corp. WDC has been downgraded from equal-weight to underweight by Evercore ISI analyst C.J. Muse. Further, Muse lowered the target price by $5 to $30 per share, triggering a massive decline of 4.9% in its share price.

The company’s growth has been hampered by increasing competition in the enterprise SSD category and the company’s risk to cut dividend led to the downturn. The company is also facing challenges owing to NAND flash pricing, which is currently on the decline on account of oversupply and weaker-than-expected growth in end-market demand. 

The impact of these headwinds has been significant on the stock.

Notably, the company’s shares have lost more than 26% in the last three months. Notably, Western Digital's share of the enterprise SSD storage market went down more than 50% over the last few years to 12% mainly owing to "technology roadmap delays" and "peers like Samsung," per Evercore.

Moreover, the stock has lost 54.6% in a year, compared with the industry’s decline of 25.9%.

Why the Downgrade?

Ballooning debt levels have been troubling Western Digital for quite some time now.  At the end of first-quarter fiscal 2019, net debt amounted to $6.49 billion, up from $6.16 billion reported in the previous quarter. According to Muse, this situation can pose a serious threat to the company's $2 per share annual dividend.

Muse wrote, “While ~98% of the outstanding debt does not come due until 2023, we are hard pressed to see the company's current dividend as sustainable in the current market.”

The analyst also lowered outlook for earnings per share for 2019. Muse now expects earnings per share to be $2.92, down from $4. The decrease can be attributed to lower average sales prices for Western Digital's memory chips.

The analyst believes that one of the primary reasons behind weak sales was the increasing competition, especially from Seagate STX, Hitachi, Samsung and Intel INTC in the storage market.

Moreover, any downturn in macroeconomic and foreign exchange volatility conditions is likely to make it difficult for the company to pay or refinance debts, going ahead.


Frequent management changes, though made with an intention of a turnaround is also raising skepticism.

However, solid adoption of flash-based products — on the back of increase in capacity enterprise products, and demand for data center devices and cloud solutions — are noteworthy. The 12 TB drive, in particular, is witnessing rapid adoption among other capacities across emerging and established markets.

Western Digitalhas a Zacks Rank #3 (Hold).  A better-ranked stock in the technology sector is Pure Storage, Inc. PSTG, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings per share growth rate for Pure Storage is projected to be 17.5%.

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