Stock Analysis

Western Digital (NASDAQ:WDC) sheds US$600m, company earnings and investor returns have been trending downwards for past five years

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NasdaqGS:WDC
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Statistically speaking, long term investing is a profitable endeavour. But unfortunately, some companies simply don't succeed. For example the Western Digital Corporation (NASDAQ:WDC) share price dropped 56% over five years. That's not a lot of fun for true believers. And we doubt long term believers are the only worried holders, since the stock price has declined 38% over the last twelve months. Furthermore, it's down 15% in about a quarter. That's not much fun for holders.

Given the past week has been tough on shareholders, let's investigate the fundamentals and see what we can learn.

Our analysis indicates that WDC is potentially undervalued!

In his essay The Superinvestors of Graham-and-Doddsville Warren Buffett described how share prices do not always rationally reflect the value of a business. One imperfect but simple way to consider how the market perception of a company has shifted is to compare the change in the earnings per share (EPS) with the share price movement.

During five years of share price growth, Western Digital moved from a loss to profitability. Most would consider that to be a good thing, so it's counter-intuitive to see the share price declining. Other metrics may better explain the share price move.

The revenue decline of 2.5% isn't too bad. But if the market expected durable top line growth, then that could explain the share price weakness.

You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).

earnings-and-revenue-growth
NasdaqGS:WDC Earnings and Revenue Growth December 4th 2022

Western Digital is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. Given we have quite a good number of analyst forecasts, it might be well worth checking out this free chart depicting consensus estimates.

What About The Total Shareholder Return (TSR)?

We'd be remiss not to mention the difference between Western Digital's total shareholder return (TSR) and its share price return. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. Western Digital's TSR of was a loss of 52% for the 5 years. That wasn't as bad as its share price return, because it has paid dividends.

A Different Perspective

We regret to report that Western Digital shareholders are down 38% for the year. Unfortunately, that's worse than the broader market decline of 14%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 9% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. To that end, you should learn about the 2 warning signs we've spotted with Western Digital (including 1 which is a bit unpleasant) .

But note: Western Digital may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

What are the risks and opportunities for Western Digital?

Western Digital Corporation 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.

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Rewards

  • Trading at 13.5% below our estimate of its fair value

  • Earnings are forecast to grow 99.37% per year

Risks

  • Debt is not well covered by operating cash flow

  • Shareholders have been diluted in the past year

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1Y Return

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