Western Digital Analysts Maintain Mostly Bullish Stances Despite Long NAND Recovery

Shares of Western Digital Corp WDC were trading lower Tuesday in the wake of the storage solutions provider's disappointing fiscal third-quarter report.

The Analysts

• Wells Fargo Securities analyst Aaron Rakers maintained an Outperform rating on Western Digital with a $65 price target.
• Bank of America Merrill Lynch analyst Wamsi Mohan reiterated a Buy rating and $60 price target.
• KeyBanc Capital Markets analyst Weston Twigg maintained a Sector Weight rating.

Wells Fargo Recommends Buying On Weakness

Western Digital's fourth-quarter gross margin and EPS guidance are clearly negative, but the earnings-induced weakness presents a buying opportunity, Rakers said in a Monday note.

The analyst based his stance on two factors: 

• Investors reading the implied NAND flash gross margin guidance as conservative, especially if flash price declines decelerate and the company executes on cost down.
• The company's incrementally positive commentary on improving demand.

Wells Fargo significantly lowered its EPS estimates for the fourth quarter from 54 cents to 10-30 cents.

Third-quarter lash revenue was slightly below expectations, primarily due to a steeper-than-expected drop in blended flash ASP, Rakers said.

Gross margins of 21 percent reflect a $110-million inventory writedown, trailing Wells Fargo's 25.4-percent estimate. Yet HDD revenue exceeded estimates, the analyst said. 

See also: Longbow Turns Bullish On Western Digital, Projects 'A Line Of Sight To Cyclical Recovery'

BofA Identifies 7 Positives 

Notwithstanding the negative reaction to the results, BofA's analysis highlighted seven positives and five negatives from the print, Mohan said in a Tuesday note. 

The Positives

• Stronger-than-expected capacity HDDs.
• Stabilization of inventories and lower flash supply growth that likely slowed the rate of price declines.
• The likelihood of Western Digital's conservative expectations for NAND recovery driving some upside late in 2019.
• The full benefit from cost of sales and opex reductions coming before the year's end.
• Higher-than-expected industry C19 capacity enterprise Exabyte growth.
• Renegotiation of debt covenants that will likely help the company withstand a protracted downturn in NAND.

The Negatives

• Fiscal fourth-quarter guidance that was significantly below consensus on weak flash gross margins.
• Estimates that continue to be revised lower.
• An apparent delay in NAND recovery.
• Negative third-quarter free cash flow, which could continue to remain negative over the next few quarters.
• The renegotiation of a covenant likely reflecting company's expectations that NAND weakness will persist longer.
• BofA lowered its estimates on the delayed NAND recovery but maintained its thesis on Western Digital. 

Ongoing Profitability Challenges In NAND Keep KeyBanc Sidelined 

The roughly in-line fourth-quarter revenue guidance was due a recovery in demand for capacity enterprise HDDs, Twigg said in a Monday note. Western Digital expects revenues to improve through the year, the analyst said. 

KeyBanc meaningfully lowered its margin assumptions given the pressures coming from soft NAND pricing.

"While we expect NAND pricing to begin to recover in C2H19, we remain Sector Weight due to likely ongoing profitability challenges in NAND," Twigg said. 

The Price Action

Western Digital shares were down 3.59 percent at $48.66 at the time of publication Tuesday. 

Related Link: Analysts See Western Digital Nearing A Bottom After Disappointing Q2 Results, Guidance

Photo courtesy of Western Digital.