Market Overview

Sell-Side Moves To Sidelines On Western Digital After Q1 Miss, Below-Consensus Guidance

Sell-Side Moves To Sidelines On Western Digital After Q1 Miss, Below-Consensus Guidance

Hard drive manufacturer Western Digital Corp (NASDAQ: WDC)'s shares were tumbling Friday after the company reported after the close Thursday with in-line fiscal first-quarter non-GAAP earnings per share and revenue that trailed expectations

The Analyst

JPMorgan analyst Harlan Sur downgraded shares of Western Digital from Overweight to Neutral and reduced the price target from $117 to $62.

Longbow Research analyst Joe Wittine downgraded Western Digital from Buy to Neutral.

JPMorgan: Stock Now A 'Show-Me' Story 

The quarterly miss is a result of continued headwinds in flash pricing that are partly offset by solid capacity-optimized surveillance HDD and embedded flash solutions, JPMorgan analyst Sur said in a Friday note.

The analyst said he expects the second quarter of fiscal 2019 as well as the medium-term outlook to be pressured by continued weak NAND market pricing and overall muted demand. The company's weaker-than-expected Q2 revenue guidance reflects the continuation of NAND ASP weakness through the rest of fiscal 2019, Sur said. 

A potential slowdown could be coming in spending on capacity-optimized HDD by hyperscale customers, which carry premium margins, according to JPMorgan. 

This, along with CPU shortages and other macro and geopolitical fears, could impact Western Digital's margin potential through 2019 and beyond, Sur said. 

Western Digital is a "show me" story and is most likely to trade sideways for the next few quarters until NAND pricing improves and HDD demand fundamentals pick up, the analyst said. 

JPMorgan sees potential for outperformance in the long run on future higher-density HDDs and penetration into enterprise SSDs.

Abrupt Earnings Contraction, Visibility Hurt Sentiment

Q2 guidance that markedly undercut estimates is due to a more pronounced oversupply of NAND that is expected to continue through mid-calendar 2019, Longbow's Wittine said in a Friday note.

The company is responding by cutting wafer starts by 10-15 percent, the analyst said. 

Nearline HDD exabytes are also expected to remain flattish in the first half of 2019, Wittine said.

Longbow attributed the downgrade to the abrupt contraction in Western Digital's earnings power and visibility.

"We believe the stock will eventually rally before the rally in NAND fundamentals becomes clear, though are not willing to make that call today until gaining more conviction in the bottom for both the NAND and nearline cycles." 

The Price Action

Western Digital shares have lost about 31 percent year-to-date.

The stock was plunging 19.38 percent to $43.54 at the time of publication Friday. 

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Latest Ratings for WDC

Sep 2020Cleveland ResearchUpgradesUnderperformNeutral
Sep 2020Craig-HallumUpgradesHoldBuy
Aug 2020Wells FargoMaintainsOverweight

View More Analyst Ratings for WDC
View the Latest Analyst Ratings


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