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Is Western Digital (WDC) Doomed to Have a Terrible 2019 Too?

Awantika Poddar

Western Digital Corp. WDC, once considered the arch rival of Micron MU and Seagate Technology STX, has been in a troubled spot for a while. The stock, which was trading around $76 in January 2017, is now hovering around $38.

Year to date, the company’s shares have lost 51.3% compared with the industry’s decline of 22.7%. Western Digital is facing issues like sluggishness in hard drives demand and weakness in flash storage pricing.

Challenges Facing Western Digital

Western Digital is one of the largest hard disk drive (HDD) producers in the United States. The company is facing challenges due to NAND flash pricing, which is currently on the decline due to oversupply and weaker-than-expected growth in end-market demand. Therefore, a drop in prices could impact the company, and may offset the benefits from improved demand and prices of DRAM products.

Western Digital has been reporting sluggish results off late. Revenues fell 3% year over year to $5.03 billion in first-quarter fiscal 2019. Also, earnings of $3.04 per share declined 14.6% from the year-ago quarter. Decrease in flash output and Geopolitical tension in China along with stiff competition was the major causes for the dismal show.

The company shipped 34.1 million HDDs at an average selling price (ASP) of $72. The reported shipments were lower than the year-ago figure of 42.2 million. The company intends to temporarily reduce flash output.

Notably, in the first quarter of fiscal 2019, client devices’ revenues (52.7% of total revenues) declined roughly 1% year over year and came in at $2.65 billion, primarily owing to sluggishness in hard drives demand.

Further, gross margin, a key financial metric in determining a company’s basic financial health, has persistently declined over the last two quarters. In first-quarter fiscal 2019, gross margin contracted 430 basis points to 38%, following a decline of 40 basis points in the fourth quarter. Decline in gross margin has been primarily due to a reduction in flash ASPs.

Moreover, Western Digital faces stiff competition from Seagate, Hitachi, Samsung and Intel in the storage market.

In addition, ballooning debt levels have been troubling Western Digital over time.  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. 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.

Additionally, frequent management changes, though made with an intention of a turnaround, is raising skepticism.

Optimism Surrounding Acquisition and Product Rollouts

Western Digital is significantly benefiting from synergies related to SanDisk and HGST acquisitions. The acquisition of SanDisk has opened new avenues of growth for Western Digital which has helped it boost market traction in the newer storage technology – SSD.

We believe, 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.

The company’s strength in BiCS3 and BiCS4 offerings deserve a special mention. Western Digital began sampling its 1.33 TB, four-bits-per-cell infrastructure for 96-layer 3D NAND BiCS4 device.

The company also expanded its data center solutions portfolio. The company unveiled new ActiveScale5.3 object storage system, Ultrastar Serv60+8 hybrid storage server platform and new enhancements to its IntelliFlash N Series family.

Western Digital is focusing more on the enterprise side, which is the key growth area in the information technology sector. Apart from this, the focus shift toward enterprise is likely to reduce the company’s dependence on the PC market and will help in improvising margins.

Can the Stock Stage a Comeback in 2019?

Shares of the company has decreased 14.7% month to date, underperforming the industry’s loss of 11.9%.

The scenario for 2019 is not encouraging for Western Digital that currently has a Zacks Rank #5 (Strong Sell). The Zacks Consensus Estimate for fiscal 2019 earnings is likely to witness a decline of 52.6% year over year. The consensus mark for revenues is expected to decline 13.1% over the same time frame.

Hence, investors should wait and see how Western Digital performs in the months ahead.

Another Computer Storage Stock Hogging Attention

Pure Storage, Inc. PSTG delivered an average positive earnings surprise of 72.9% in the trailing four quarters. It has a long-term earnings growth rate of 17.5% and Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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