WDC: AI Storage Demand Will Support Higher Margins Amid Cycle Uncertainty

Analysts have nudged our Western Digital fair value estimate higher to about $187 per share from roughly $181, reflecting stronger than expected enterprise HDD and NAND demand, improving pricing and margin dynamics, and higher forward valuation multiples following a series of Street price target hikes into the $135 to $200 range.

Analyst Commentary

Bullish analysts have broadly raised price targets into the mid 100s to $200 range, citing a combination of better than expected earnings execution, improving supply demand conditions in both HDD and NAND, and rising confidence in Western Digital's ability to sustain higher margins through the current cycle.

Bullish Takeaways

• Bullish analysts highlight that recent quarters delivered upside on revenue, gross margin, and EPS versus already elevated expectations, reinforcing confidence in management's execution and cost discipline.
• Several upward estimate revisions are tied to stronger enterprise and nearline HDD shipments, more favorable pricing, and a view that structurally higher utilization and AI driven cloud demand can support a longer, stronger upcycle.
• Many price target hikes explicitly assume higher long term gross margin and operating margin profiles, supported by improved mix, leadership in hybrid SMR capacities, and accelerating economic accretion in HDD.
• AI, cloud infrastructure, and data rich workloads are seen as powerful multi year tailwinds for both HDD and NAND, with some analysts arguing that the market remains supply constrained, which could underpin pricing and multiples beyond the near term.

Bearish Takeaways

• More cautious analysts, even while raising targets, are maintaining neutral stances and flag that part of the recent share price strength reflects multiple expansion that could reverse if pricing or demand normalizes faster than expected.
• There is concern that some forward estimates may still be conservative, implying that any disappointment versus rising Street expectations could pressure the stock despite underlying fundamentals remaining healthy.
• Visibility into longer dated contractual arrangements and next generation HDD technologies is still limited, and any delays in scaling new platforms or securing favorable renewal terms could temper the current margin and growth narrative.
• Macro volatility and cyclicality in memory and storage remain overhangs, with cautious voices emphasizing that AI and cloud demand could prove choppier than currently embedded in premium valuation frameworks.

What's in the News

• Unveiled next generation AI and HPC storage solutions and partnerships at Supercomputing 2025, including 32TB UltraSMR HDDs and expanded NVMe oF architectures to reduce bottlenecks and improve GPU utilization (Key Developments).
• Expanded its Open Composable Compatibility Lab ecosystem with new partners such as ASUS, Solidigm, Leil Storage, Open E, and Swiss Vault to deliver pre validated, vendor neutral, disaggregated storage solutions (Key Developments).
• Opened an expanded 25,600 square foot System Integration and Test Lab in Rochester to accelerate qualification of high capacity HDDs and support over 2,000 customer systems across AI and cloud workloads (Key Developments).
• Completed repurchase of 9.2 million shares, or 2.66% of shares outstanding, for $702.41 million under the buyback announced in May 2025 (Key Developments).
• Raised its quarterly cash dividend by 25% to $0.125 per share and issued fiscal second quarter 2026 revenue guidance centered around $2.9 billion (Key Developments).

Valuation Changes

• The fair value estimate has risen slightly to approximately $187 per share from about $181, reflecting modestly stronger long term fundamentals.
• The discount rate has edged down marginally to roughly 8.42% from about 8.43%, indicating a slightly lower perceived risk profile in the updated model.
• Revenue growth has increased slightly to around 13.60% from about 13.36%, incorporating a more constructive outlook for top line expansion.
• The net profit margin has eased slightly to roughly 24.73% from about 24.89%, suggesting a modestly more conservative view on long term profitability.
• The future P/E has risen slightly to about 21.0x from roughly 20.4x, implying a modest increase in the valuation multiple applied to forward earnings.