Why Western Digital Fell Today

What happened

Hard disk drive (HDD) and NAND flash producer actions western digital (NASDAQ: WDC) fell today, down 5.8% at 3:13 p.m. ET.

Western Digital reported earnings yesterday after the market closed. While the company’s bottom line exceeded estimates, revenue fell short. Additionally, management forecast sharp declines for the current quarter, well below analysts’ expectations. Finally, some may have been disappointed by management’s non-commitment to a recent activist investor proposal.

So what

In its fourth fiscal quarter, Western Digital reported revenue of $4.53 billion, down 8% from a year earlier, as well as non-GAAP (adjusted) earnings per share of $1.78, down 18%. This earnings result actually exceeded analysts’ expectations, even though revenues were lower.

As has been the case for many chip-related companies, the company’s sales to cloud customers remain quite strong, up 5% year-over-year, but the customer and consumer devices declined, dropping 14% and 23% respectively.

However, guidance for the current quarter was very, very weak, with revenue expected to fall to $3.7 billion and adjusted earnings per share at just $0.50 in the middle of the guidance range. Management noted PC makers are scaling inventory amid weak near-term demand, but also expects the PC market to eventually recover next year, driven by the new paradigm. of hybrid work established after the pandemic. Management also noted that demand for cloud computing remains strong.

Also on the conference call with analystsmanagement has responded to the recent proposal by activist hedge fund Elliott Management to split the company’s HDD and flash businesses into two companies. CEO David Goeckeler said:

The executive committee of the board, which I lead, continues to oversee the review, and Elliott Management is participating alongside us under a nondisclosure agreement, along with other interested parties. We are evaluating a range of alternatives, including options to separate our market-leading flash and HDD franchises. We are moving quickly, but this work will take time.

Now what

It was a bad day for Western Digital, which has underperformed its peers over the years and has now delivered another frustrating quarter. However, with the stock price just five times the estimate next year, as well as the potential for the company to spin off this year, Western Digital looks like an attractive option for value investors looking for specific catalysts. that could unlock value.

Of course, if you think the broader tech sector is undervalued after this year’s slump, it may be better to invest in higher quality chip stocks with more stable profitability that now trade at attractive valuations. Western Digital’s HDD business is stable and profitable, but does not have very high growth. Meanwhile, it’s been hard for flash producers to make a lot of money amid oversupply and price wars.

So while Western Digital is cheap and could be compelling if it adopts Elliott’s proposal, some of its peers would be better options if you think tech stocks will continue to rally. So catalyst-focused Western Digital may be more or less appealing depending on how appealing you think the alternatives are today.

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Billy Duberstein has no position in the stocks mentioned. Its clients may hold shares in the companies mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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