Wedbush Finds 6 Reasons To Avoid Western Digital

Hard drive and NAND maker Western Digital Corp WDC is "significantly overvalued" and the stock has downside potential of around 25%, according to Wedbush.

The Analyst

Matthew Bryson initiated coverage of Western Digital with an Underperform rating and $32.50 price target.

The Thesis

The case against owning Western Digital's stock is based on six negative attributes, Bryson said in a Wednesday initiation note: 

• The flash market remains weak with an uncertain demand outlook, but the stock is pricing in a rebound.
• Cannibalization in the HDD market, especially in notebooks this year and gaming next year.
• The relationship with Toshiba is defined by friction and fragility after Toshiba sold its memory business to Bain Capital in 2017.
• Western Digital continues to see a mass exodus of workers with "valuable institutional knowledge." One notable executive departure was Sanjay Mehrotra, who joined the company as part of the SanDisk acquisition but left to become the CEO of Micron Technology, Inc. MU. 
• A favorable reputation of beating earnings estimates and offering conservative guidance may have come to an end. The first-quarter miss was coupled with an outlook that is not "justifiable" amid a deterioration in NAND pricing. 
• Heavy R&D in the systems business is unlikely to generate long-term upside given heavy competition and difficulties in combining the systems with device designs.

Price Action

Western Digital shares were up 2.68% at $44.77 at the time of publication Thursday.

Related Links:

Western Digital Analysts Maintain Mostly Bullish Stances Despite Long NAND Recovery

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