Goldman Sachs: Buy Western Digital, It Has 29% Return Potential

In a report published Thursday, Goldman Sachs analyst Bill Shope upgraded the rating on

from Neutral to Buy, while raising the price target from $106 to $122. In the report Goldman Sachs noted, "…WD's current valuation fails to fully recognize that the company's business is increasingly bolstered by non-PC Exabyte growth, and this, coupled with MOFCOM and capital allocation optionality, suggests this is an opportune time to buy the stock." The company's mix shift towards enterprise and its positive impact on long term growth are not reflected in the current stock valuation. However, the substantial pressure from weak PCs seems fully factored into Western Digital's current share price. Shope commented, "One of the most important dynamics within the HDD industry is the ongoing shift from PC to enterprise demand. We estimate that PCs will represent 38% of Western Digital's revenue in CY2015, down from nearly 70% in CY2007. As a result, PC volatility is not nearly as big of a driver of fundamentals as it once was." Shope expects Western Digital's PC related shipments to decline 9 percent per annum over CY2014-CY2016 and its enterprise unit shipments to increase at an 8 percent CAGR over the same period. Analyst Bill Shope believes that Western Digital's long term gross margins will remain within its guided range of 27-32 percent as its mix further improves in favor of enterprise.