Shrinking HDD Market And Asian Rivalry Will Weaken Outlook

Key Takeaways

• Ongoing market shifts toward advanced storage and intensifying competition threaten Western Digital's revenues, margins, and long-term growth prospects.
  
• Structural industry changes, heavy debt, and slow innovation increase risks to reliable earnings and future shareholder returns.
  
• Strong innovation, disciplined industry dynamics, and growing demand in data centers are boosting Western Digital's financial stability, margin potential, and long-term growth outlook.

Catalysts

Develops, manufactures, and sells data storage devices and solutions in the United States, China, Hong Kong, Europe, the Middle East, Africa, rest of Asia, and internationally.

• Despite short-term strength from hyperscale cloud demand and long-term agreements supporting near-term revenue, Western Digital's reliance on hard disk drives puts it at risk as enterprise and consumer market share for HDDs continues to shrink in favor of more advanced solid-state storage. This ongoing shift is expected to drive structural revenue declines and compress gross margins over the long term.
  
• The company faces intensifying global competition, particularly from Asian NAND/flash manufacturers, which is likely to drive down average selling prices and erode any premium Western Digital maintains on its higher-capacity drives; this trend threatens both revenue growth and net margin expansion as product commoditization increases.
  
• Although Western Digital emphasizes technological innovation with new architectures like UltraSMR and upcoming HAMR drives, its slower pace of innovation relative to major competitors risks sustained market share losses, further pressuring revenue and leading to gross margin volatility as customers migrate to faster-evolving alternatives.
  
• Long-term industry trends toward alternative storage technologies (such as DNA storage and CXL memory pooling) threaten to reduce the total addressable market for traditional HDD and NAND products, undermining Western Digital's future growth prospects and introducing the possibility of permanent net margin contraction.
  
• Persistent high leverage from recent business separations and the historical burden of restructuring charges remain a drag on earnings predictability and capital flexibility; as cyclicality and commoditization grow, Western Digital's ability to generate dependable free cash flow and support shareholder returns will be increasingly imperiled.

Western Digital Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Western Digital compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Western Digital's revenue will decrease by 12.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.8% today to 15.7% in 3 years time.
• The bearish analysts expect earnings to reach $1.7 billion (and earnings per share of $5.8) by about July 2028, up from $1.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, down from 21.9x today. This future PE is lower than the current PE for the US Tech industry at 19.4x.
• Analysts expect the number of shares outstanding to grow by 1.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.64%, as per the Simply Wall St company report.

Western Digital Future Earnings Per Share Growth

Risks

• Robust demand visibility from long-term agreements (LTAs) with major hyperscale customers through mid-2026 provides significant revenue predictability and stability, reducing the risk of revenue declines for Western Digital.
  
• Structural industry changes, including tight supply-demand balance and removal of excess capacity, have resulted in a more disciplined pricing environment, supporting strong and potentially expanding gross margins.
  
• Accelerating adoption of next-generation high-capacity drives such as UltraSMR and the upcoming HAMR technology positions Western Digital at the forefront of innovation, enabling higher average selling prices and incremental margin accretion in future earnings.
  
• The company's balance sheet is strengthening through deleveraging actions and improved free cash flow, allowing for increased capital returns to shareholders (via dividends and potential buybacks), which can drive earnings per share and share price upwards.
  
• Continued secular growth in enterprise and hyperscale data center markets, fueled by unrelenting data creation and AI workloads, expands Western Digital's addressable market and underpins long-term revenue and net income growth prospects.

Valuation

• The assumed bearish price target for Western Digital is $40.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Western Digital's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $40.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $10.6 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 8.6%.
• Given the current share price of $66.53, the bearish analyst price target of $40.0 is 66.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.