Western Digital stock gapped up when the company, in September, announced it would split its disk drive and memory chip business into two separate segments as a part of a restructuring aimed at boosting growth and profit. Does that make WDC stock a buy as 2020 winds down?
The company said it was aligning its $16.7 billion storage portfolio to position for growth, profitability and agility. The restructuring will help it leverage “go-to-market and operational synergies” to address the broad storage needs of its customers.
Western Digital stock has struggled to gain traction in the past few years, partly due to the cyclical nature of its business and swings in memory chip prices. The stock took a downward slide starting more than a year ago as prices for its memory chips plunged due to market saturation, as did its revenue and earnings growth. WDC stock looked to be on the rebound, until the coronavirus pandemic and stock market correction halted its momentum.
The company has been around a long time and survived several sharp tech-industry downturns over decades by reinventing itself. It has worked its way up the ranks to become a leading supplier of disk drives and flash-based memory chips.
Western Digital was founded in 1970 as a manufacturer of electronic test equipment. The company shifted to being a specialty chipmaker for various data-storage devices. It then diversified into other technologies as the PC market emerged into an explosive revenue opportunity.
The company entered the disk drive market in the 1980s through acquisitions and internal growth. Its two major rivals in disk drives are Seagate Technology (STX) and Toshiba.
Acquisition Of SanDisk
The company’s biggest acquisition was the $19 billion purchase of flash memory maker SanDisk in 2016. The acquisition of SanDisk enabled Western Digital to offer a broad portfolio of storage solutions across a wide range of markets.
Rivals in the memory chip market include Japanese giant Samsung Electronics, Micron Technology (MU), Intel (INTC) and South Korea’s SK Hynix.
Western Digital customers include cloud service providers, internet and social-media infrastructure players. They also include providers of PCs and data servers. Its products are used in smartphones, tablets, notebooks, cameras, game consoles and set-top boxes, automotive applications and devices that make up the Internet of Things.
The company has also built strong consumer brands for disk drives and memory chips, marketed under the SanDisk, WD and HGST brands. HGST stands for Hitachi Global Storage Technologies, which Western Digital acquired for $4.3 billion in 2011.
The storage industry is increasingly utilizing tiered architectures with hard-disk drives, solid-state drives and other memory-based storage technologies to address an expanding set of uses and applications. It’s a trend that favors WDC stock.
In addition, the growth in cloud computing applications, connected mobile devices and Internet connected products is driving unabated growth in the volume of digital content to be stored.
Western Digital Earnings Analysis
Western Digital reported fiscal first-quarter results on Oct. 28. Revenue fell 3% to $3.9 billion. That was above Wall Street estimates of $3.8 billion.
It reported adjusted earnings of 65 cents per share, beating views of 55 cents and up 91%.
Western Digital forecast fiscal second-quarter revenue to be in the range of $3.75 billion to $3.95 billion and non-GAAP earnings per share in the range of 40 cents to 60 cents. That’s in-line with analyst expectations.
David Goeckeler, Western Digital chief executive, addressed the company’s restructuring plan during the conference with analysts.
“Over the coming quarters, I believe we will continue to see the compelling benefits of this strategy,” he said. “There are significant operational and go-to-market synergies with our integrated flash and disk drive portfolios, which are important competitive differentiators for Western Digital.”
Is WDC Stock A Buy?
A fundamental and technical analysis of Western Digital stock is a key component of determining whether it’s worth buying. As a result, by those metrics, shares may not be appealing to many investors.
The IBD Stock Checkup Tool shows that Western Digital has a weak IBD Composite Rating of 54 out of a best-possible 99. The rating means Western Digital stock currently outperforms just 54% of all stocks. That’s in terms of the most important fundamental and technical stock-picking criteria. IBD recommends stocks should have a rating of at least 80.
In addition, it has a Relative Strength Rating of 41 out of 99. The rating tracks market leadership. It shows how a stock’s price movement measures up against all other stocks in IBD’s database.
The results are that Western Digital stock is not a buy.
However, on a positive note, WDC stock has an Accumulation/Distribution Rating of A-. That rating analyzes price and volume changes in a stock over the past 13 weeks of trading. Its current rating indicates more funds are buying than selling. A grade of A signals heavy institutional buying. The lowest rating of E means heavy selling. Think of the C grade as neutral.
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Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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