Western Digital Has 5% Upside: Here's Why You Should Be A Little Concerned

Goldman Sachs’ Mark Delaney expressed a constructive outlook for Western Digital Corp’s WDC fundamental in the near term, based on expectations of improved supply and demand for NAND and HDD during 2HCY16.

Delaney reinitiated coverage of the company with a Neutral rating and price target of $50.

NAND Margins Could Decline

“Positively, WD now has higher NAND/SSD exposure, we expect improved NAND and HDD supply/demand in 2HCY16, we see upside risk to near-term Street estimates, and we believe valuation is favorable on our estimates,” the analyst mentioned.

However, Delaney also expects a meaningful decline in NAND margins in the intermediate term, due to a combination of a stronger Yen, potential oversupply risk in 2017 and other factors.

There could also be reduced revenue in 4QCY16 and 2017, with Western Digital needing to renegotiate the Samsung license.

Positioned For Growth

In addition, Delaney believes that the SanDisk Corporation SNDK acquisition better positions Western Digital for growth, with NAND/SSDs now more than 35 percent of sales.

“However, while we appreciate that revenue is now what some have called “future proofed”, WD will still be subject to cyclical/product cycle issues,” the analyst said.

The FY16 and FY17 EPS estimates have been lowered, while the FY18 EPS estimate has been raised, to reflect the inclusion of SanDisk in the estimates.