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Western Digital Corp WDC

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Western Digital Nearing Deal With Kioxia to Become Global NAND Behemoth; Maintain $70 FVE

Analyst Note

| William Kerwin |

On Aug. 25, the Wall Street Journal reported that Western Digital was in advanced talks to merge with rival chipmaker Kioxia for upwards of $20 billion. In our view, such a deal would be a defensive, but prudent, move by Western to reinforce its competitive position in the swiftly consolidating chip market. In the long term, we expect the NAND market to follow the dynamics of DRAM and HDDs, and consolidate down to about three leading players for a largely commoditylike product. We aren’t surprised by the report, especially following reports earlier this year that Western and rival Micron were interested in a Kioxia tie-up. We think Western would be materially better off by beating Micron to the deal, as we think either deal would create three dominant players in NAND, and Western would avoid being on the outside looking in. Nevertheless, a potential deal wouldn’t alter our no-moat or stable moat trend ratings for Western. We view NAND from different suppliers as largely fungible and vulnerable to market supply-demand dynamics and think Western would be expanding its invested capital base without materially improving its returns on invested capital. We also maintain our $70 fair value estimate for Western Digital until a deal is officially announced. Shares are trading up near our fair value following the news.

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Company Profile

Business Description

Western Digital is a leading vertically-integrated supplier of data storage solutions, spanning both hard disk drives (HDDs) and solid state drives (SSDs). In the HDD market it forms a practical duopoly with Seagate, and it is the largest global producer of NAND flash chips for SSDs in a joint venture with competitor Kioxia.

5601 Great Oaks Parkway
San Jose, CA, 95119
T +1 408 717-6000
Sector Technology
Industry Computer Hardware
Most Recent Earnings Jun 30, 2021
Fiscal Year End Jul 2, 2022
Stock Type Cyclical
Employees 65,600