After 50% Gains This Year Will AI Demand Continue To Drive Western Digital Stock Higher?

Western Digital (NASDAQ: WDC) has seen its stock price surge over 55% this year, while its peer Seagate (NASDAQ: STX) saw over 25% gains. The rise in WDC stock lately can be attributed to higher demand for memory targeted at artificial intelligence applications. Memory prices have been trending higher after witnessing meaningful declines last year, amid reduced purchases by enterprise customers. TrendForce estimates that contract prices for  NAND flash to be up 15% to 20% in Q2 this year. ^[1] The demand is also picking up from the PC market and high-end smartphones. Note that Western Digital is in the process of splitting into two verticals — hard drive and NAND business. The current CEO of Western Digital — David Goeckeler  — will head the NAND flash memory spinoff company, while Irving Tan, currently executive vice president of global operations, will assume the leadership role for the standalone hard disk company. The spinoff is expected to be completed in the second half of this year, and it is largely seen as a positive for the company.

Looking at WDC performance over a slightly longer term, it has seen gains of 45% from levels of $55 in early January 2021 to around $80 now, vs. a similar change for the S&P 500 over this roughly three-year period. However, the increase in WDC stock has been far from consistent. Returns for the stock were 18% in 2021, -52% in 2022, and 66% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that WDC underperformed the S&P in 2021 and 2022.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and AVGO, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could WDC face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, we think WDC stock is appropriately priced at its current levels of $80. We estimate Western Digital’s valuation to be $76 per share, aligning with its current market price. At its current levels, WDC stock is trading at 1.9x sales, compared to the 1.1x average value over the last five years. An uptick in valuation multiple seems justified with the company’s restructuring plans and expected pickup in sales after a meaningful fall in fiscal 2023.

Western Digital posted a solid 35% growth in exabytes shipped for its cloud business, 25% gains for HDD, and a 20% uptick in exabytes sold for Flash business in Q3’24. This trend is expected to continue, while pricing should also support revenue growth going forward. Also, AI is driving demand for memory and storage to support increased data-processing. Overall, Western Digital appears to be on the right track, with a recovery in sales and earnings in sight. While much of the positives appears to be priced in, WDC stock may remain volatile in the near term, reacting to demand and storage pricing trends, as well as updates related to the spin-off of the NAND business.

While WDC stock looks appropriately priced, 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.

[1] Returns as of 6/18/2024
[2] Cumulative total returns since the end of 2016

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1. TrendForce Press Release, May 7, 2024 [↩]