AI And Hyperscaler Demand Will Expand Storage Opportunities

Key Takeaways

• Deep partnerships with hyperscalers and innovative drive technologies position the company to capture strong, sustained market and margin expansion from AI-driven storage demand.
  
• Improved financial health and platform solutions enable ongoing investment, expanded market reach, and greater shareholder returns.
  
• Dependence on few cloud customers, market shifts, trade uncertainty, and emerging storage technologies threaten long-term growth, margin stability, and revenue diversification.

Catalysts

Develops, manufactures, and sells data storage devices and solutions based on hard disk drive (HDD) technology in the Americas, Asia, Europe, the Middle East, and Africa.

• The explosive increase in unstructured data generated by AI applications, Agentic AI, and cloud-based services across industries is driving unprecedented storage needs. Western Digital's deep integration with leading hyperscalers (e.g., all top 5 with firm POs/LTAs covering the next 12–18 months) positions the company to benefit from secular demand, directly fueling higher long-term revenue growth.
  
• Higher adoption of Western Digital's larger capacity, high-value ePMR and UltraSMR drives-with rapid qualification and ramp cycles-demonstrates customer trust and enables both pricing power and favorable product mix, leading to structurally higher gross margins and improved net margins over time.
  
• The company's next-generation roadmap (final ePMR and upcoming HAMR drives) allows for sustained aerial density improvements and cost efficiencies, supporting continued profitability and margin expansion as data requirements grow.
  
• Platform solutions, targeting a new class of native AI/neo-cloud companies lacking in-house storage teams, open up incremental markets and new revenue streams, broadening Western Digital's addressable market and supporting topline growth.
  
• Ongoing balance sheet improvements, significant debt reduction, and robust free cash flow generation increase financial flexibility; this supports both continued R&D investment to capitalize on long-term demand trends and shareholder returns (dividends, buybacks), ultimately enhancing EPS and return on equity.

Western Digital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Western Digital's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.8% today to 18.1% in 3 years time.
• Analysts expect earnings to reach $2.2 billion (and earnings per share of $6.6) by about September 2028, up from $1.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.4 billion in earnings, and the most bearish expecting $1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.5x on those 2028 earnings, down from 20.5x today. This future PE is lower than the current PE for the US Tech industry at 24.3x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

Western Digital Future Earnings Per Share Growth

Risks

• Heavy reliance on a small number of hyperscale/cloud customers (90%+ of revenue) exposes Western Digital to significant concentration risk-any shift to in-house custom storage or alternative technologies by these customers could materially impact long-term revenue and earnings.
  
• Persistent decline in consumer and flat client segment revenues (down 12% and up only 2% YoY respectively) signals growing dependence on the cyclical cloud/datacenter market, posing risks to diversified topline growth and long-term revenue stability.
  
• Ongoing global tariff uncertainty and potential for abrupt changes in trade policy increase operational complexity and could drive higher costs or sudden demand disruptions, leading to lower net margins and earnings volatility.
  
• Secular shift towards cloud-native architectures and alternative storage technologies (including increased adoption of SSDs, custom storage solutions by hyperscalers, or emerging memory types) could eventually outpace HDD/UltraSMR advancements, threatening Western Digital's long-term relevance and affecting revenue growth.
  
• Mix-driven gross margin improvements depend on successful ramp-up and customer adoption of new technologies (e.g., UltraSMR, HAMR); slower-than-anticipated transitions or failure in manufacturing yields and reliability could compress margins and dampen earnings.

Valuation

• The analysts have a consensus price target of $89.143 for Western Digital based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $110.0, and the most bearish reporting a price target of just $62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $11.9 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 8.4%.
• Given the current share price of $94.54, the analyst price target of $89.14 is 6.1% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.