Western Digital (WDC) Shares Pull Back On Weak Guidance; Creates A Good Entry Point
3:41 pm Monday, January 10th, 2022
Western Digital’s (NASDAQ:WDC) stock continues its steep decline as worsening supply chain issues keep hindering the flash and hard disk drive (HDD) storage manufacturer’s growth. That impact is primarily apparent in the company’s weak guidance. After guiding Q2 (Dec) adjusted EPS and revenues well below consensus last quarter, WDC again guided quarterly earnings and revs significantly below estimates for Q3 (Mar). The company expects adjusted EPS of $1.50-1.80 and revs of $4.45-4.65 bln for Q3. Although WDC’s Q3 guidance does translate to 10% growth yr/yr at the midpoint, it also represents a 6% drop sequentially, which would mark WDC’s second consecutive quarter of sliding growth qtr/qtr.
The disappointing guidance stemming from lingering supply chain woes is all the more surprising since WDC’s main competitor Seagate (STX) delivered solid DecQ results earlier this week despite enduring similar headwinds. STX’s in-line Q3 guidance may not have been much to write home about, but that company also did not experience the same crippling component shortages that WDC did. Furthermore, STX raised its full-year margins guidance, while WDC provided a more muted outlook on margins over the next couple of quarters.
Most of WDC’s supply chain problems affect its customers’ ability to build and ship products. WDC primarily manufacturers storage products that are then sold to OEMs. So although WDC is facing rising component costs as it keeps up with customer demand, it seems as though most of the impact is outside WDC’s control.
The tight component availability primarily dents WDC’s margins. As a result, non-GAAP gross margins fell 30 bps sequentially to 33.6%. WDC expects further margin declines in MarQ and anticipates that pressure will continue in both its HDD and flash segments for at least the next two quarters as component costs continue increasing.
Despite the sequential drop in margins, adjusted EPS still topped WDC’s prior guidance of $1.95-2.25; the company posted Q2 earnings of $2.30 per share. Revs also still jumped nicely at 22.6% yr/yr to $4.83 bln despite headwinds, ending up in-line with WDC’s prior forecast of $4.70-4.90 bln.
As was the case for STX, cloud revenue led total growth for WDC in the quarter, jumping 89% yr/yr to $1.9 bln. Unlike STX, however, exabyte shipments fell sequentially at WDC as supply chain disruptions impacted cloud HDD deployments. Nevertheless, the rapid yr/yr growth shows the resilient demand for HDDs, which made up around 40% of total revs for WDC.
Overall, it was another rough report for WDC, again due to downside guidance. Investors may be further shaken by WDC’s pronounced supply chain problems, given that STX appears to be doing a much better job avoiding those issues.
However, WDC is still benefiting from similar tailwinds as STX is, such as digital transformations leading to accelerated cloud demand and a general need for more storage as applications require more space. Also, we mentioned last quarter that WDC tends to rebound when business looks weak, noting that another guide down might cause an even further pullback, setting WDC up for a solid recovery. Therefore, since shares are now down another ~4% since then, WDC’s unimpressive Q2 report looks to have resulted in a nice entry point, especially since WDC now trades at a very attractive 5x FY23 earnings while numerous catalysts rest on the horizon.
