+ 2.69
+ 1.88%

Oversupply And 3 Other Reasons Goldman Downgrades Western Digital To Sell

August 3, 2016 8:37 am
Share to Linkedin Share to Twitter Share to Facebook Share to Print License More

Western Digital Corp (NASDAQ: WDC) faces NAND margin risk and secular pressure in HDDs, Goldman Sachs’ Mark Delaney said in a report. He downgraded the rating on the company to Sell from Neutral, while reducing the price target to $38 from $47.

Reasons For Downgrade

Analyst Mark Delaney mentioned that there is 16 percent downside for Western Digital, versus 2 percent “average upside for our coverage.” He mentioned that the NAND margin risk arises from the following factors:

  1. Oversupply: NAND capex is expected to rise to 45-50 percent in 2016, creating oversupply in 2017.
  2. 3D Yield Risk: Western Digital lags Samsung in 3D NAND and is making attempts to ramp quickly, which creates yield risk.
  3. Royalty: The royalty agreement with Samsung ends on August 14 this year, and currently represents 8-9 percent of Western Digital’s EBIT. The company would need to renegotiate the agreement, and would possibly receive a lower rate.
  4. China: Chinese companies are poised to enter the NAND market.

“We also expect long-term declines in HDD sales,” Delaney wrote.

Related Link: Western Digital Is Haunting Me

Estimates Below Consensus

The EPS estimates for FY17, FY18 and FY19E have been reduced from $3.15 to $3.00, from $5.27 to $4.55 and from $5.50 to $5.00, respectively, to reflect lower sales and margins. The EPS estimates for FY17 and FY18 are 25-30 percent below the Street.

“To the extent the stock trades higher on short-term events, we would use it as an opportunity to Sell the stock given risks that we believe could pressure WD’s business in the next few years,” the analyst commented.

Do you have ideas for articles/interviews you'd like to see more of on Benzinga? Please email feedback@benzinga.com with your best article ideas. One person will be randomly selected to win a $20 Amazon gift card!

For the latest in financial news, exclusive stories, memes follow Benzinga on Twitter, Facebook & Instagram. For the best interviews, stock market talk & videos, subscribe to our YouTube channel.

Related Articles

Micron Analysts Stay Bullish Amid Cycle Turning, Demand-Supply Tightness

Goldman Sachs Upgrades Semis, Is 'More Positive' On Memory Stocks

Hearing Morgan Stanley Says Micron And Western Digital Likely To Benefit From Stronger NAND Pricing; Unconfirmed

Wedbush Analyst Matthew Bryson Attributes Strength In Memory Names To Better-Than-Expected NAND Pricing Increases Reported By SK Hynix; Also Notes Microsoft Guiding For 'Steady' Capex Next Quarter, Says 'generally lighter forward cloud/hyperscale spend has been one of the more significant concerns for component/memory stocks.'