Western Digital Stock Set To Rally Further On Higher AI Demand

Western Digital stock (NASDAQ: WDC) has seen a 2x rise in value since early January 2023 – jumping from levels of $32 then to $66 now – vs. an increase of 47% for the S&P 500 over this period. In comparison, its peer – Seagate stock (NASDAQ: STX) – has seen a 60% rise over this period. Both companies are seeing a recovery in storage demand, amid the AI boom. The rise in WDC stock can primarily be attributed to a significant 200% rise in the company’s P/S ratio to 1.7x now, versus 0.5x in 2022. This was partly offset by a 31% decline in total revenues over this period.

Investors have rewarded WDC stock, thanks to the rebound in its sales of storage products and expansion of profit margins lately. The increase in WDC stock over recent years has been far from consistent, with annual returns being considerably more volatile than the S&P 500. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it 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 around rate cuts and multiple wars, 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? We estimate Western Digital’s valuation to be $80 per share, reflecting over 20% upside from its current levels of around $65. Our estimate is based on 1.5x forward expected revenue of $53 per share. The 1.5x figure is higher than the stock’s average P/S ratio of 1.2x over the last three years. However, an uptick in valuation multiple seems justified with the company’s restructuring plans and expected pickup in sales and profits after a meaningful fall in 2023.

Western Digital’s revenue has declined 31% from $18.8 billion in 2022 to $13 billion in 2024. This can be attributed to a slowdown in enterprise demand and a decline in pricing. The revenues have seen marginal growth in fiscal 2024, up 5.6% y-o-y. Memory prices have been trending higher after witnessing meaningful declines in 2023, amid reduced purchases by enterprise customers. TrendForce estimates that average selling prices for NAND flash to be up 5% to 10% sequentially in Q3 this year, after rising 15% in Q2. ^[1] While the pricing growth is a positive, the overall demand in the retail and PC market is weak, partly due to higher inventory levels.

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. Western Digital has also seen its profitability improve lately. Its gross margin fell from 31% in 2022 to 15% in 2023, but recovered to 23% in 2024. Looking at the latest quarterly performance, Western Digital reported net sales of $3.8 billion in Q4’24, up 41% from $2.7 billion in Q4’23, primarily due to higher HDD, SDD, and Flash shipments. Gross margin surged to 35.9% during the quarter versus 3.4% in the prior-year period. WDC reported adjusted EPS of 0.88, vs. $(2.26) in Q4’23. Going forward, gross margin is expected to improve further.

We expect Western Digital’s revenue to rise at an average annual rate of around 17% from $13 billion in 2024 to $21 billion in 2027. Also, its adjusted earnings per share are expected to surge to over $10 in 2027, compared to a loss of $0.20 per share in 2024. Investors have also rewarded the stock with a higher valuation multiple, but is it worth picking now? We think so. We believe that the positives around AI demand and the company’s storage solutions are not fully priced in for Western Digital. Notably, the average analyst price estimate of $88 for WDC also reflects nearly 35% upside, implying that the stock has more room for growth.

While WDC stock looks like it may see higher levels, 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.

Curious about the impact of a market crash on WDC stock? Our dashboard How Low Can Western Digital Stock Go In A Market Crash? has a detailed analysis of how the stock performed during and after previous market crashes.

[1] Returns as of 9/18/2024
[2] Cumulative total returns since the end of 2016

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1. NAND Flash Shipments Growth Slows in 2Q24, Revenue Up 14% Driven by AI SSD Demand, Says TrendForce, Sep 9, 2024 [↩]