Western Digital Likely For Sharp Revenue Decline Taking Cue From Seagate, Intel & Microsoft, Analyst Says

  • Credit Suisse analyst Shannon Cross reiterated Neutral on Western Digital Corp WDC with a $42 price target.
  • Western Digital will likely report 2Q23 results after the market on Jan. 31, 2023.
  • The analyst estimates 2Q23 revenue of $2.93 billion (down 39% Y/Y), vs. consensus of $2.98 billion and guidance between $2.9 billion - $3.1 billion. 
  • Cross believes demand remains weak across most end markets (e.g., PCs, smartphones, cloud, smart video). However, management pointed to better visibility weekly at its Annual Technology Conference in November. 
  • The analyst estimates HDD revenue declined 33% Y/Y to $1.48 billion, reflecting inventory digestion at cloud and OEM customers and ongoing weakness in China, taking a cue from Seagate Technology Holdings PLC's STX 2Q23 results.
  • Cross estimate Flash revenue declined 45% Y/Y to $1.44 billion driven by a deteriorating pricing environment (NAND pricing was down >20% Q/Q), continued weak smartphone and notebook demand, and cloud digestion taking a cue from Intel Corp INTC and Microsoft Corp MSFT.
  • Cross expects signs of meaningful demand recovery to begin in 4Q23 (June).
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  • The analyst estimated gross margin declined 1,364 bps Y/Y to 19.9%, mainly driven by underutilization charges, and the estimated operating margin was down 2,081 bps Y/Y to negative 2.6%. 
  • As a result, the analyst estimates non-GAAP EPS of negative $(0.23) vs. consensus of negative $(0.15) and guidance between negative $(0.25) - $(0.05). 
  • While management is confident this downcycle is temporary, the analyst thinks near-term uncertainty surrounding the strategic review will add to volatility. 
  • Price Action: WDC shares traded lower by 1.82% at $44.15 on the last check Monday.
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