Western Digital (NASDAQ:WDC) Reports Weak Q3
Leading data storage manufacturer Western Digital (NASDAQ: WDC) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 48.9% year on year to $4.10 billion. The company expects next quarter’s revenue to be around $4.3 billion, slightly below analysts’ estimates. Its non-GAAP profit of $1.78 per share was 4% above analysts’ consensus estimates.
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Western Digital (WDC) Q3 CY2024 Highlights:
- Revenue: $4.10 billion vs analyst estimates of $4.12 billion (in line)
- Adjusted EPS: $1.78 vs analyst estimates of $1.71 (4% beat)
- Adjusted Operating Income: $884 million vs analyst estimates of $847.8 million (4.3% beat)
- Revenue Guidance for Q4 CY2024 is $4.3 billion at the midpoint, slightly below analyst estimates of $4.34 billion
- Adjusted EPS guidance for Q4 CY2024 is $1.90 at the midpoint, slightly below analyst estimates of $1.92
- Gross Margin (GAAP): 37.9%, up from 3.6% in the same quarter last year
- Inventory Days Outstanding: 121, down from 126 in the previous quarter
- Operating Margin: 18.1%, up from -21.7% in the same quarter last year
- Free Cash Flow was -$14 million compared to -$750 million in the same quarter last year
- Market Capitalization: $22.87 billion
“Western Digital’s performance in the fiscal first quarter demonstrates our commitment to operational excellence and disciplined capital investment as our focus on lasting quality and reliability, driven by industry leading innovation and a diversified portfolio, has allowed us to target the most attractive end markets to improve profitability,” said David Goeckeler, Western Digital CEO.
Company Overview
Founded in 1970 by a Motorola employee, Western Digital (NASDAQ: WDC) is a leading producer of hard disk drives, SSDs and flash memory.
Memory Semiconductors
The rapid growth in data generation and the need to support increases in processing power for everything from consumer devices to data center servers are driving the demand for memory chips. From the content delivery networks and edge computing to the cloud, data storage is a key component underpinning the global technology architecture. On top of that, secular growth drivers like machine learning and the boom in media-rich digital content are further accelerating the need for storage. Like all semiconductor segments, memory makers are highly cyclical, driven by supply and demand imbalances and exposure to consumer product cycles.
Sales Growth
A company’s long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Over the last five years, Western Digital’s revenue declined by 1.6% per year. This shows demand was weak, a rough starting point for our analysis.
Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Western Digital’s recent history shows its demand has stayed suppressed as its revenue has declined by 9.4% annually over the last two years.
This quarter, Western Digital’s year-on-year revenue growth of 48.9% was magnificent, and its $4.10 billion of revenue was in line with Wall Street’s estimates. Management is currently guiding for a 41.8% year-on-year increase next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 23.7% over the next 12 months, an acceleration versus the last two years. This projection is commendable and indicates the market thinks its newer products and services will spur faster growth.
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Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business’ capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Western Digital’s DIO came in at 121, which is 10 days above its five-year average. These numbers suggest that despite the recent decrease, the company’s inventory levels are higher than what we’ve seen in the past.
Key Takeaways from Western Digital’s Q3 Results
We were impressed by Western Digital’s strong gross margin improvement this quarter. We were also like that its adjusted operating profit and adjusted EPS both beat expectations. While guidance for next quarter's revenue and adjusted EPS slightly missed Wall Street’s estimates, the market seemed to overlook this. The stock traded up 7.9% to $71.72 immediately following the results.
So should you invest in Western Digital right now?When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.
