Western Digital Poised for Growth

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[Click Here]( What we’re watching [Western Digital Poised For Growth]( With the global data storage market on the increase Western Digital is poised to take advantage. [Watch Now]( Stock Analysis Western Digital Poised for Growth The global data storage market is expected to grow at a compound annual rate of 26% between 2022-2027. Western Digital (WDC) sits front and center of this trend. As one of the largest hard disk drive (HDD) producers in the U.S., the company services consumer, commercial, and cloud clients. Although it’s only the fifth most searched computer hardware stock by financial pros in January, we believe markets are sorely underpricing the company’s potential. You see, back in 2019, the company saw revenues nosedive from $20.6 billion to $16.6 billion due to a supply glut in the market. Those days are over as constraints on the system have created a multi-year backlog, allowing the company to achieve pricing power and improved profitability. With improved cash flow and substantial growth potential, we see a lot of upside for this company. Western Digital’s Business Based in San Jose, California, Western Digital designs, develops, manufactures, and markets hard disks used in everything from PCs to cloud servers. Data storage drives are often split into hard disk drive (HDD) and solid state drive (SSD). HDD drives are less expensive but more inefficient than SSD drives which are preferred in laptops and growing in usage. The company also sells flash storage technology which is critical for mobile devices. Western digital splits its business into three main categories: cloud, client, and consumer. While client and consumer business revenue growth has been stagnant, cloud storage has become a massive revenue generator for the company. We can also break down Western Digital’s business into flash and hard drive revenues. As you can see, the margins in each business are fairly similar. Western Digital has made several acquisitions over the years to boost its holdings including SanDisk which opened up the flash drive market. The company has also been in a long-term partnership with Kioxia to create 3D Flash memory. Financials As we mentioned earlier, Western Digital faced steep declines in revenues and profits due to a glut in the memory market in 2018. This sent shares of the company plunging more than 50% over the following year. As Covid curtailed production, the imbalance flipped the other way, helping Western Digital and other memory manufacturers improve margins over the last year. In fact, gross margins are nearing their peak hit in 2018 with flash memory nearly there. We expect flash to grow alongside mobile devices and the IoT in the coming years. HDD should continue to see steady growth as more companies lean on cloud computing for what’s becoming an increasingly remote workforce. One concern many analysts point to is the heavy debt load the company carries which is coming due quite soon. Management likes to point out that the current debt to adjusted EBITDA is 2.7x compared to 4.0x in Q1 last year. Cash flow has certainly improved to the point where the company could make serious headway in paying down its debt. The only issue we take is that management is looking at keeping a debt to EBITDA ratio of 1.0x-3.5x. That’s fine when profits are reliable. And there’s certainly reason to believe there is a multi-year inventory build cycle upon us. We’d rather see them manage the ratio between 1.0x-2.0x as well as roll their debt out further in time to capture better interest rates now. Valuation Across all the metrics for Western Digital relative to the technology sector, the company appears incredibly cheap. With forward P/E ratios below 10x, a forward price to cash flow ratio of 6x, and a price to sales ratio of 1.06x this stock is a bargain. In fact, compared to its own 5-year average, Western Digital is trading at a discount with few exceptions, such as price to sales. And even then it’s just barely worse than the average. Our Opinion - 9/10 There are a lot of reasons to love Western Digital. If we can get the stock back down at $50, we’d consider it a steal. [Make sure to sign up for The Spill to keep receiving our premier investment newsletter.]( # [submit to reddit]( [submit to reddit]( [submit to reddit]( To ensure delivery of all emails, [whitelist us](. Update your email preferences or unsubscribe [here](. View our privacy policy [here](#). Copyright ©2022 InvestingChannel. All rights reserved. 1325 Avenue of the Americas, Floor 27 & 28 New York, New York 10019 Disclaimer: This is not investment advice. This InvestingChannel, Inc. newsletter is for information purposes only and opinion-based. Futures, forex, stock, and options trading are not appropriate for all investors. 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