Will Western Digital Stock Rebound To Its Pre-Inflation Shock Highs?

Western Digital stock (NYSE: WDC) currently trades at $40 per share, roughly 45% below its level in March 2021, and it has little room for growth, in our view. WDC saw its stock trading at around $45 in late June 2022, just before the Fed started increasing rates, and is now 11% below that level. The stock has gained 22% since September 2022 compared to the S&P 500, which gained about 20% during this period. The rise in WDC stock over the recent months can be attributed to its reportedly ongoing discussions for a merger with Japan’s Kioxia Holdings. ^[1] Still, rising concerns about a potential recession and its impact on Western Digital’s already struggling flash memory business due to tepid demand exist. The decline in Western Digital’s revenues over recent quarters also remains a concern.

Returning to the pre-inflation shock level means that WDC stock will have to gain 95% from here. However, we do not believe that will materialize any time soon and estimate Western Digital’s valuation to be around $44 per share, implying about 10% gains. This is because of unfavorable macroeconomic conditions and storage price erosion. Western Digital’s operating margin has also contracted from 7.2% in 2021 to 0.5% now. Our Western Digital Operating Income Comparison dashboard has more details. However, any development around the company’s merger talks with Kioxia could result in meaningful changes to WDC stock price.

Our detailed analysis of Western Digital’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how WDC stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

WDC and S&P 500 Performance During 2007-08 Crisis

WDC stock declined from $25 in September 2007 (pre-crisis peak) to around $14 in March 2009 (as the markets bottomed out), implying WDC stock lost nearly 45% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $44 in early 2010, rising a stellar 220% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

WDC Fundamentals Over Recent Years

WDC revenues rose from $16.6 billion in 2019 to $18.8 billion in 2022 (the fiscal ends in June) due to high demand for cloud storage. However, the trailing twelve months’ sales have declined to $14.2 billion due to significant storage price erosion and reduced purchases by enterprise customers. Western Digital’s reported earnings increased to $4.81 in 2022, compared to a loss of $2.58 per share in 2019. For the last twelve month period, the company has posted a loss of $2.16 per share.

Does WDC Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Western Digital’s total debt decreased from $10.5 billion in 2019 to $7.1 billion now, while its total cash decreased from around $3.5 billion to $2.2 billion over the same period. The company garnered $1.9 billion in cash flows from operations in 2022. Given its cash position, Western Digital appears to be in a comfortable position to meet its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Western Digital (WDC) stock has the potential for solid gains once fears of a potential recession are allayed. That said, the uncertainties around the storage pricing and near-term demand outlook remain risk factors to realizing these gains.

While WDC stock looks like it can see some gains, it is helpful to see how Western Digital’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Varex Imaging vs. Western Digital.

Despite higher inflation and the Fed raising interest rates, among other factors, WDC stock has risen 26% this year. Can it drop from here? See how low Western Digital stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

[1] Month-to-date and year-to-date as of 6/12/2023
[2] Cumulative total returns since the end of 2016

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1. Exclusive: Kioxia, Western Digital speed up merger talks as memory chip demand slumps, Maki Shiraki and Makiko Yamazaki, Reuters, May 15, 2023 [↩]