Western Digital: Nice Quarter, But Some Say This Is As Good As It Gets

Following a stellar third-quarter results and blowout calendar year 2017 guidance from Western Digital Corp WDC, Jefferies said it is as good as it gets. The firm downgraded shares of the company, citing the risk/reward for the shares, which it feels is balanced.

Fiscal Q3 Print

Analyst James Kisner noted quarterly revenues totaled $4.65 billion, above the consensus estimate of $4.57 billion, driven by strong NAND performance. The earnings per share of $2.38 also beat the consensus estimate of $2.14, the firm added. The analyst also referred to the company's statement that it sees an opportunity of achieving non-GAAP earnings per share of $12 for the calendar year 2017.

Impressed With Execution

Jefferies said it is impressed with the company's execution, especially in 3D NAND.

"WDC's comment that 64-layer is already cheaper on a per-bit basis than 15nm planar surprised us and gives us greater confidence the company will be competitive as the industry makes the transition to 3D," the firm added.

Concerned Over NAND Market Dynamics

The firm indicated that it is concerned over the NAND market dynamics over the next 12–18 months due to two reasons:

1. Supply returning to standard industry growth as the major players complete 3D NAND ramp and stabilize yields.
2. Demand growth slowing post the potential launch of the iPhone 8.

The firm expects investors to increasingly look forward to a supply/demand parity point or eventual oversupply. Such a scenario, according to the firm, will cause the multiple on the shares of Western Digital to contract even as earnings continue to rise near term.

Additionally, the firm said the wide range of outcomes possible for a potential acquisition of the Toshiba Corp (USA) TOSYY Memory business adds further potential variability in earnings.

Moving To Sidelines For Now

The firm currently models earnings per share of $12 for the calendar-year 2017 and $11 for the calendar-year 2018. As such, the firm said it is moving to the sidelines for now.

However, the firm said strong demand support for NAND provided by the ongoing enterprise adoption of flash and increasing storage content per unit in phones and the potential acquisition of Toshiba Memory business is preventing the firm from being further negative.

Jefferies downgraded the shares of the company to Hold from Buy, while it lowered its price target to $90 from $100.

At the time of writing, shares of Western Digital were down 2.20 percent at $87.11.

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