VALUATION HIGHLIGHTS

1. Cloud constitutes 50% of the Trefis price estimate for Western Digital's stock.
2. Client constitutes 31% of the Trefis price estimate for Western Digital's stock.
3. Consumer constitutes 19% of the Trefis price estimate for Western Digital's stock.

WHAT HAS CHANGED?

Latest Earnings- Q1 2025

Western Digital reported mixed Q1 with EPS of $1.78, which beat analysts' consensus estimates of $1.55 by $0.23. Quarterly revenue rose 48.9% year-over-year(y-o-y) to $4.10 billion, below the consensus estimate of $4.12 billion. The revenue rise was attributed to higher HDD, SDD, and Flash shipments.During the first quarter, its adjusted gross margin surged to 38.5%, up 220 basis points.

Note:Western Digital's FY'24 ended on June 30, 2024. Q1 FY'25 refers to the quarter that ended on September 30, 2024.

Outlook

WDC expects fiscal second-quarter 2025 revenue to be in the range of $4.20 billion to $4.40 billion. It also anticipates non-GAAP EPS in the range of $1.75 to $2.05.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Western Digital's value that present opportunities for upside or downside to the current Trefis price estimate for Western Digital:

• Client Revenue: Western Digital's second-largest revenue stream, Client, could see a strong growth in the coming years, driven by a rise in storage demand, including for AI. moderate revenue rise in the coming years. However, if revenue growth is slower than anticipated and rises to only $6.5 billion by the end of our review period, it will result in a 10% downside to our price estimate for Western Digital.
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• Cloud Revenue: We estimate that the cloud revenue for Western will surge from its current level of $5.4 billion in FY 2024 to $13 billion by the end of our forecast period. This would largely mirror the trend in the enterprise storage market globally. There would be a potential downside to the current price estimate if the company is unable to gain market share in rising AI demand. If Western Digital's cloud revenues were to rise to around $10 billion by the end of our forecast period, there would be an upside of about 15% to the current price estimate.

For additional details, select a driver above or select a division from the interactive Trefis split for Western Digital at the top of the page.

BUSINESS SUMMARY

Western Digital Corporation is a leading manufacturer and developer of storage products that help create, manage, experience, and preserve digital content. The company is primarily into the designing and manufacturing of storage devices, flash storage, networking equipment, and home entertainment products under the WD (Western Digital), SanDisk, HGST (Hitachi Global Storage Technologies), and G-Technology brands. The company serves markets addressing storage opportunities for enterprise and cloud data centers, clients, consumer electronics, backup, the internet and other emerging markets such as automotive and home and small office networking.

Western Digital's principal products are hard drives that use one or more rotating magnetic disks to store and allow access to data as well as solid-state drives. Its hard drives are used in desktop and notebook computers, corporate and multiple types of data centers, home entertainment equipment, and stand-alone consumer storage devices. Solid-state drives and flash storage products are used by data centers, enterprise clients, as well as smartphone manufacturers.

SOURCES OF VALUE

Cloud Computing Drives Data Center Sales

We estimate that the cloud storage business of Western Digital, driven by robust growth in the cloud computing industry due to the penetration of high-end storage solutions in data centers, will remain the most valuable division.

SSDs and Flash Storage Business Helps Margins

The HDD market is fairly commoditized, and customers are price-sensitive, which has led to lower prices and margins. Comparatively, SSD sales help drive gross margins since they have higher prices and gross margins as compared to traditional spinning disc hard drives. Although the price gap between SSDs and HDDs has narrowed over the years, SSDs are still more expensive than HDDs.

KEY TRENDS

The high growth of digital content is driving the need for higher storage capacity to store, aggregate, host, distribute, manage, backup, and use digital content. The need to access rich data and content is being driven by a highly mobile and increasingly connected user base.

AI Boom

AI is driving demand for memory and storage to support increased data-processing. The company stands to benefit from its storage offerings targeting AI, given the rising need for enterprises to capture more data. Western Digital plans to launch two new products to support AI workloads.

Shift From Hard Disk Drives To Solid-State Drives

All leading laptop manufacturers are now offering laptops with a SSD primary memory. Solid-state drives are more expensive per GB, and this is the primary reason for the slow adoption of SSD as the primary memory component. As production capacity increases and technology changes lead to a drop in SSD prices, we can expect that solid-state drives will become a standard for notebooks.

Growing Usage Of Smartphones And Portable Devices

Tablets and smartphones generally use solid-state memory chips or flash storage as their primary storage memory, and we estimate that portable device sales will nearly cannibalize notebook and netbook sales by the end of our forecast period. HDD memory is relatively unresponsive, slow, and bulky and will not find application in tablet computers. The increasing popularity of portable devices is the primary reason for growth in the SSD space.

Growth In Cloud Computing And Remote Storage Services

We expect Western Digital's enterprise business to be driven by businesses deploying cloud computing environments in an effort to pool resources and cut costs. Remote storage is becoming a standard for most enterprises and has even gained traction with retail customers with services like Dropbox, Skydrive, and Google Drive.

To achieve the high performance needed with cloud computing, we can expect the SSD enterprise storage drives to become popular in the future.