On August 5, Western Digital Corporation (WDC) released its Fiscal Q4-2022 earnings results. Despite declining profits and sales compared to the year-ago quarter, the company beat EPS estimates. Nonetheless, persistent headwinds weighing on near-term demand forced the company to expect significantly lower sales and earnings for the first quarter of Fiscal 2023, which could potentially weigh down the stock in the near term. As WDC keeps getting cheaper, it may be worth considering. I am bullish on the stock.
Backed by a solid financial position and a strong product portfolio, the company is poised to pursue higher growth targets once it overcomes short-term difficulties. Looking at the long term, the company can count on a bright future for the global hardware computing market.
About Western Digital
Western Digital Corporation designs and manufactures data storage devices for various computing devices, including personal computers, laptops, tablets, mobile phones, and data centers.
The company sells its products under the G-Technology, SanDisk, and WD brands in the United States and internationally.
Fiscal Q4 EPS Exceeded Market Expectations Despite Macro Challenges
Despite known geopolitical, macroeconomic, and supply-chain challenges, Western Digital exceeded EPS expectations in its most recent earnings report. Western Digital reported adjusted earnings per share of $1.78, beating the consensus estimate by $0.04. However, WDC had total revenue of $4.53 billion, missing analyst estimates by $45 million.
Year-over-year adjusted EPS was down 18%, while revenue was down 8%. In addition, its gross margin dropped 60 basis points (bps) year-over-year to 32.3%.
Commenting on the recent results, Western Digital’s chief economic officer, David Goeckeler, said that the company is in an excellent position to capitalize on growth opportunities that the expected expansion of the global hardware computing industry will create.
Western Digital in Healthy Financial Shape
With an interest coverage ratio of 10.8x, Western Digital Corporation appears to be in solid financial shape. An interest coverage ratio of 1.5x or higher indicates that it is not a problem for a company to pay interest costs on outstanding debts. Therefore, Western Digital can easily meet its financial obligations. The higher the ratio, the better, of course.
WDC’s interest coverage ratio is calculated by dividing its adjusted operating income of $702 million for the three months ended July 1, 2022, by its adjusted interest expense of $65 million for the same period.
Growing Computer Hardware Market Equals Opportunities for Manufacturers
The size of the global computer hardware market is expected to grow rapidly in the coming years. According to The Business Research Company, the growth rate will exceed 7.5% this year, going from $1.13 trillion in 2021 to $1.22 trillion in 2022. After that, the global market is expected to grow at a compound annual growth rate of about 6.6% over the next four years, reaching $1.57 trillion by 2026.
Although the market is highly competitive due to the presence of fierce competitors such as Dell Technologies (DELL), Lenovo Group (LNVGY) (LNVGF), and Hewlett Packard Enterprise Company (HPE), it is growing so fast across continents that there is room for many other players, including Western Digital.
WDC Expects Drastically Lower Sales and Earnings Next Quarter
Looking ahead to WDC’s next quarter, which will end on September 30, the company is forecasting total revenues to be between $3.6 billion and $3.8 billion (down 29.4%-25.5% from the same period last year), while analysts collectively expected revenue of $4.74 billion.
The company also expects a gross margin of 27.5% to 29.5%, down from 33.9% in the same quarter last year.
Finally, WDC estimates that the adjusted earnings per share will be between $0.35 and $0.65 (down 84.1%-70.5% year-over-year) versus the consensus of $1.96.
Wall Street’s Take on WDC Stock
In the past three months, 13 Wall Street analysts have issued a 12-month price target for WDC. The stock has a Moderate Buy consensus rating based on nine Buys and four Holds. The average WDC price target is $61.08, implying 29.7% upside potential.
Conclusion: Downtrend Could Make WDC a Good Buy
Western Digital Corporation beat EPS expectations in its final quarter of Fiscal 2022. However, due to macroeconomic headwinds, year-over-year earnings and sales shrunk, and the company also forecasts negative growth next quarter. These results are likely to push the stock price lower over the next few weeks, creating a better entry point for a company that has a strong portfolio and operates in a fast-growing global hardware computing market.
After a market value decline of around 17% over the past three months, shares are trading at around $47, not too far off their 52-week low of $41.63.
Still, the company has solid operations in international markets, which, combined with rosy long-term expectations for the global hardware computing market, should lead to improved revenues and sales in the future. The share price should benefit from this over the long term.
