Updated Research Report on Western Digital - Analyst Blog

On Jun 3, 2014, we issued an updated research report on Western Digital Corp. WDC.

Western Digital is the largest HDD manufacturer in the U.S. It is worth noting that IT research firm Gartner expects worldwide HDD shipments to grow at a compound annual growth rate (CAGR) of 2.9% from 2013 (552 units) to 2018 (635.1 units).

 The firm also stated that high-capacity business drives are expected to grow at a CAGR of 25.1% during the period. Western Digital's new high-capacity helium drives target this growth opportunity.

Moreover, the company is expected to get good mileage from its cloud-based business. Cloud-based storage has become the order of the day as it enables the access of content through different gadgets such as smartphone, tablets and personal computers.

We believe the secular growth of digital data and growing exposure to the small and medium business space are the long-term positives. The company is launching storage devices to attract more customers.

Moreover, Western Digital's strategic acquisitions to widen its SSD offerings are expected to position it better with respect to peers such as Seagate STX and SanDisk Corp. SNDK. However, continued investments in product innovation could result in flattish margins in the near term.

Another positive can be derived from the significant rise in contribution from the company's non-PC segment, which accounted for 53% of the revenues in the third quarter of 2014.  

Nonetheless, weaker-than-expected PC shipments are affecting Western Digital's results. According to IDC's latest report, shipments are expected to decline 6.1% in 2014. Although the rate of decline is expected to stabilize from 9.8% registered in 2013, the company's return to growth remains a distant possibility.

Customer concentration is a major risk for Western Digital. In the last reported quarter (third-quarter 2014), Western Digital's top 10 customers contributed 44% to the revenues. Thus, the loss of a single order or customer affects the operating performance significantly. Competition from its peers has led to a decline in average selling price ASP. For the nine months ended Mar 28, 2014, Western Digital's ASP declined $3.00 from the year-ago period to $59.00. Any further decline will impact the results if the shipments do not improve considerably.

Currently, Western Digital has a Zacks Rank #3 (Hold). Investors may consider a better-ranked stock like Micron Technology MU which sports a Zacks Rank #1 (Strong Buy).

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