AI Demand And HAMR Technology Will Expand Horizons

Key Takeaways

• Strong AI-driven demand and innovation in storage technology are expected to drive revenue growth and improve net margins.
  
• Disciplined capital management and customer agreements support sustained growth, stable margins, and enhance shareholder returns.
  
• Geopolitical tensions, demand drops, operational challenges, and dependency on hyperscale customers pose risks to revenue growth, margins, and earnings stability.

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.

• Western Digital is benefiting from strong demand in the age of AI, leading to expectations of revenue growth driven by increased data generation and the critical need for mass storage solutions like HDDs.
  
• The company's strategic focus on innovation, including advanced 11-disk drives and upcoming HAMR technology, is expected to enhance product offerings, potentially boosting net margins due to superior technology leverage.
  
• Long-term agreements with key hyperscale customers provide visibility into future demand, supporting expectations for sustained revenue growth and potentially stable gross margins.
  
• Western Digital's disciplined capital allocation plan, which includes reducing debt and initiating a shareholder dividend, is positioning the company for strong free cash flow generation and shareholder returns.
  
• The company's operational focus on supply chain agility and resilience in response to potential tariff impacts may stabilize operating expenses and protect profitability, helping maintain or grow net margins.

Western Digital Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Western Digital's revenue will decrease by 12.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 15.6% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $5.47) by about May 2028, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.6x on those 2028 earnings, up from 14.5x today. This future PE is greater than the current PE for the US Tech industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 6.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.13%, as per the Simply Wall St company report.

Western Digital Future Earnings Per Share Growth

Risks

• Geopolitical uncertainties, including tariffs and shifting trade dynamics, pose risks to supply chain stability and could negatively impact revenue and operating costs.
  
• Lower demand in the enterprise and certain parts of the distribution and retail business is anticipated due to tariff-related uncertainties, potentially affecting overall revenue growth.
  
• Manufacturing operational challenges and technology transitions, such as the ramp-up of new products, could lead to increased costs or reduced margins if not managed effectively.
  
• Significant reliance on hyperscale customers for revenue, where demand fluctuations or over-ordering could create inventory imbalances, impacting gross margins and earnings.
  
• Expectations of increased operating expenses due to investments in R&D and filling critical positions could pressure earnings if not offset by proportional revenue growth.

Valuation

• The analysts have a consensus price target of $57.682 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 $94.0, and the most bearish reporting a price target of just $38.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $10.4 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 19.6x, assuming you use a discount rate of 9.1%.
• Given the current share price of $44.29, the analyst price target of $57.68 is 23.2% higher.
• 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.