Western Digital stock gapped up last month when the company 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 Western Digital stock a buy?
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. The company 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.
It 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.
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 Stock: Earnings Analysis
Western Digital reported fiscal fourth-quarter results on Aug. 5, for the period ended July 3. Results met expectations but the company presented an outlook for the current quarter that disappointed. Western Digital stock fell 15% in reaction.
Revenue climbed 18% to $4.28 billion from the year-ago period. Adjusted earnings soared more than 600% to $1.23 per share.
But Western Digital offered fiscal first-quarter revenue estimate in the range of $3.7 billion to $3.8 billion. Wall Street estimates at the time called for $4.4 billion. It expects adjusted earnings in the range of 45 cents to 65 cents. Analysts were looking for $1.39.
“Western Digital Chief Executive David Goeckele said in a conference call with analysts at the time that “uncertainty remains.”
Goeckeler was appointed CEO on March 5. Previously, he was executive vice president and general manager of Cisco’s $34 billion networking and security business. He succeeded Steve Milligan, who previously announced his intended retirement.
Is Western Digital 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 32 out of a best-possible 99. The rating means Western Digital stock currently outperforms just 32% 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 9 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. In addition to its weak ratings, the stock is sitting on the 50-day moving average and its relative strength line is near record lows, both negative signals.
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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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