Analyst Note| William Kerwin |
We lower our fair value estimate for no-moat Western Digital to $50 per share, from $60, in response to poorer expectations for fiscal 2023. We'd been forecasting fiscal 2023 to be a downcycle in both the hard disk drive (HDD) and flash markets, but we now expect it to be a more harsh environment, on both pricing and volume. WD is experiencing lower demand from cloud customers for its HDDs, and flash pricing is cratering amid a glut of supply caused by demand reduction. This is the perfect storm for Western Digital. Its strategy to pursue both the HDD and flash storage markets gave it higher growth potential, but increased its vulnerability to cyclicality and heightened capital intensity that in our view erodes its chance at an economic moat. Shares were flat in early market trading, which may indicate that most of WD's downcycle risk is priced in. When considering its long-term opportunity, we view Western Digital as undervalued, but reiterate our High uncertainty rating.