WDC: AI Storage Demand Will Sustain Tight Supply And Margin Upside

Analysts nudged our Western Digital fair value estimate modestly higher, from $180.57 to $181.43, citing a wave of sharply higher Street price targets that reflect stronger than expected exabyte shipments, tighter HDD and NAND supply, improving pricing, and conviction that AI driven storage demand will support structurally higher growth and margins.

Analyst Commentary

Street research has turned meaningfully more constructive on Western Digital, with a series of higher price targets reflecting a stronger fundamental and cyclical backdrop across both HDD and NAND. Bullish analysts cite better visibility into AI driven storage demand, tighter supply conditions, and improving pricing power as key drivers of earnings and multiple expansion.

At the same time, some caution remains around the durability of the current upcycle, the conservatism of management guidance, and execution risks tied to technology transitions and large multiyear deals.

Bullish Takeaways

• Bullish analysts see upside to revenue and EPS forecasts as exabyte shipments outpace prior expectations and pricing trends improve in both HDD and NAND, supporting higher valuation multiples.
• Several target hikes are underpinned by the view that AI infrastructure buildouts, cloud spending, and data retention needs will sustain structurally higher nearline HDD demand and gross margins through mid decade.
• Commentary highlights Western Digital's product and technology positioning, including leadership in hybrid SMR capacities, progress on higher capacity platforms, and accretive HDD economics that could extend the earnings re rating cycle.
• Supply chain checks pointing to tight capacity, extended lead times, and rising drive prices reinforce the case that the current storage cycle is stronger for longer, with potential for further estimate revisions as contracts roll through at higher pricing.

Bearish Takeaways

• Bearish analysts, where they exist, characterize some estimates as still conservative, reflecting concern that management guidance may be embedding flat to slightly lower pricing quarter over quarter, which could cap near term upside if demand or pricing moderates.
• There is lingering skepticism about the sustainability of elevated gross margins once supply normalizes, particularly if competitors accelerate capacity additions or discounting to capture AI storage workloads.
• Execution risk around long duration supply agreements and next generation technologies, such as HAMR and advanced SMR roadmaps, could pressure valuation if qualification timelines slip or if customers shift mix faster than Western Digital can adapt.
• Some cautious views within the broader hardware coverage universe suggest that, despite favorable AI tailwinds, the group may remain volatile, with Western Digital exposed to macro, capex, and pricing swings that could introduce earnings variability against rising expectations.

What's in the News

• Unveiled next generation AI and HPC storage solutions and expanded strategic partnerships at Supercomputing 2025, including broader access to UltraSMR technology, higher density Ultrastar platforms, and an enlarged Open Composable Compatibility Lab ecosystem to reduce integration risk and vendor lock in (Key Developments).
• Opened an expanded 25,600 square foot System Integration and Test Lab to speed qualification of high capacity HDDs and support over 2,000 customer systems with end to end testing for AI and cloud workloads (Key Developments).
• Completed a major share repurchase tranche, buying back 9.2 million shares for approximately $702 million, or about 2.66% of shares outstanding, under the May 13, 2025 authorization (Key Developments).
• Raised its quarterly cash dividend by 25% to $0.125 per share, payable December 18, 2025 to shareholders of record as of December 4, 2025 (Key Developments).
• Issued fiscal second quarter 2026 guidance targeting approximately $2.9 billion in revenue at the midpoint, plus or minus $100 million (Key Developments).

Valuation Changes

• Fair Value Estimate increased slightly to $181.43 from $180.57, reflecting modestly stronger growth assumptions and improved storage cycle dynamics.
• Discount Rate edged down marginally to 8.43% from 8.44%, indicating a slightly lower perceived risk profile or cost of capital.
• Revenue Growth rose modestly to 13.36% from 13.15%, incorporating higher exabyte shipments and firmer pricing expectations.
• Net Profit Margin dipped slightly to 24.89% from 25.03%, suggesting a small normalization in long term profitability assumptions.
• Future P/E nudged higher to 20.41x from 20.32x, consistent with a marginally more constructive outlook on earnings durability and multiple support.