Western Digital's Crash Will Get Worse

Western Digital Corporation (WDC) had a very good July this year, however the stock gave up almost all the gains after releasing Q4 results towards the end of the month. Although the stock has declined considerably over the last few weeks and has failed to recover, I think it has more downside to offer primarily because of its valuation.

Western Digital reported Q4 revenues of $3.49 billion, up 9.4% year over year, and beating the analysts’ estimate by $40 million. The company’s EPS came in at $0.79, surpassing the consensus by $0.08.
Although the earnings look good, shares plummeted 10% due to falling profits. Despite the company’s sales jumping almost 10%, the company’s earnings fell 38%.

To make matters worse, the company’s management further said that its earnings will decline in the next quarter as well irrespective of sales growth. Given the falling earnings, I expect Western Digital to continue heading lower as the company’s valuation is not justified.

FY2016 revenue came in at $13 billion with net income of $257 million as compared to FY 15 revenue of $14.6 billion and $1.5 billion in net income.

Western Digital provided September quarter guidance for revenue of $4.4 billion-$4.5 billion, gross margin of roughly 32%, operating expenses of approximately $875 million, interest and other expenses of roughly $245 million, tax expenses of $50 million, and EPS of $0.85-$0.90.

Currently, Western Digital is trading at 44x trailing earnings, which is too high given that it is not a growth stock.
Western Digital
Image by byrev / Pixabay
And with the company already having said that its earnings are expected to fall further, its fundamentals will get worse, which in turn will be accompanied by a drop in share price.

Although the company does have an attractive dividend yield of 4.4%, it will not be enough to support its eroding fundamentals. As a result, I think the stock is not done falling and would recommend investors to stay away.


Given the overall industry dynamic, Western Digital is a pretty risky stock to hold. The company’s high valuation, coupled with falling earnings makes for a very difficult next few months for the stock. While Western Digital may seem attractive because of its generous dividend yield, it can’t support the stock’s valuation amid the eroding fundamentals.

As a result, I expect Western Digital to head lower in the months to come and would suggest investors to stay away from the stock.

Disclosure: No position
Published on Aug 29, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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