Why Western Digital Rallied This Week

What happened

Shares of beaten-down storage-component company Western Digital (NASDAQ: WDC) rallied this week, appreciating 17% on the week through 1:18 p.m. ET Friday, according to data from S&P Global Market Intelligence.

The maker of both hard disk drives and NAND flash memory has experienced one of the worst industry downturns in recent memory as the post-pandemic boom in consumer electronics and cloud adoption has faded, leading to a huge oversupply of storage chips on the market.

However, one analyst thinks the NAND flash cycle is finally bottoming and rated Western Digital with an “overweight” rating this week, while raising his price target on the prospects for a rebound.

So what

On Thursday, analysts at Morgan Stanley reiterated an overweight rating on Western Digital while giving the stock a $52 price target, which would mark a 27% increase over the $41 price at which Western Digital started the week.

The storage industry has been in a terrible downturn for about six quarters now, but the team at Morgan Stanley notes the bottom may — with an emphasis on the word, “may” — be in. Its channel checks have noticed recent NAND flash sales at prices up 10% to 20% in September over August, jumping from the rock-bottom levels seen earlier this year. Of note, the analysts sees the increases across both consumer and enterprise applications.

All of the major NAND flash suppliers have decreased their production over the course of 2023 in an effort to balance the market. While there is still some debate as to how balanced the storage market is, it appears as though suppliers feel they can begin raising prices. Customers might believe the market will tighten further in the future, so they’re accepting the new price hikes per the analysts.

That prospect seemed to be confirmed by research site TrendForce, which also issued a press release Thursday discussing NAND flash market dynamics. TrendForce also reported the NAND flash spot market had seen a price increase as a result of more favorable contract negotiations between buyers and sellers toward the end of August, with 512 GB wafers seeing a 10% price increase in those negotiations.

However, TrendForce notes this price increase may be the result of further supplier-production cuts, especially from industry leader Samsung and not accelerating demand in the market. Likely, the NAND market will need a demand increase to recover fully.

Now what

Western Digital’s financials look pretty terrible these days, with its recently completed fiscal 2023 (Western Digital’s fiscal year ends in June) seeing revenue down 34% relative to 2022 and the company’s bottom line flipping from $4.75 in generally accepted accounting principles (GAAP) profits in 2022 to a whopping $5.44 loss in 2023.

However, investors are aware Western Digital can be a violently cyclical business both to upside and downside. With analysts identifying a potential inflection point in NAND pricing, investors are perhaps beginning to anticipate the next up cycle.

Yet investors may want to tread carefully. Western Digital has a long way to go to get back to healthy profitability. And while the recent artificial intelligence revolution is clearly sparking demand for high-performance dynamic random-access memory (DRAM), it’s unclear whether NAND and HDD storage systems will get a similar demand surge.

No doubt, NAND flash demand will grow in the future, but NAND suppliers, which outnumber DRAM suppliers, don’t seem to have trouble easily accelerating their supply, either. As such, those wishing to play a memory recovery from the AI inflection may want to seek out memory names that also produce DRAM memory, and not just NAND and HDDs, as Western Digital does.

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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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