We like a bull case thesis for Western Digital Corp (WDC) that was posted on ValueInvestorsClub. In this article we will mention the crux of that thesis. You can read the full article by clicking here.
We often like stock analysis posted on VIC. These analysis are deep, holistic and full of value. It’s critical to evaluate a stock based on long-term prospects instead of fickle and myopic factors.
What’s The Outlook for WDC?
Western Digital Corporation is a global provider of solutions for collection, storage, management, protection of digital content. The company designs, manufactures and sells data technology products, including data storage devices, data center systems, and cloud storage services. The main drivers behind company’s high growth are 5G, Internet of Things, cloud and data storage, and Esports.
Like numerous successful turnaround stories in corporate America due to management changes, WDC has also embarked on secular growth path under the new leadership of CEO David Goeckeler. In his erstwhile senior managerial position at Cisco, he was instrumental in chalking up a 78% earnings growth over a period of 8 years.
Under Goeckelel, a complete turnaround in enterprise solid-state drives (SSD) portfolio within 6 months and capture of significant market share with new product launches has helped WDC get out of the cyclical growth model. The company’s two main product categories are hard disk drives (HDD) and flash-based businesses. Either of these two could be worth the company’s whole enterprise value. Ironically, while Team Goeckeler recognizes this, the market apparently does not. This huge discount to fair market value has currently made WDC a compelling story. While WDC is ignored and misjudged by the investment community, management is reorganizing the business in to two separate business units for full optimization.
With a market cap of $11.6 million, net debt of $6.6 billion and $3.08 billion in cash, WDC’s enterprise value is $18.2 billion. The company is determined to return to the pre-SanDisk acquisition cash-rich status. WDC has accelerated its large debt reduction program with steps such as suspension of its dividend. Over the last few quarters the company has posted a strong growth on the back of high cloud demand. Additionally, product transitions are also undermining the stock in the short term. WDC is in a sweet spot for long term growth as street analysts expect average annual growth of 35% in the flash memory devices and 14% in the HDD segment. A focused strategy to drive earnings growth will remain the key for re rating the stock.
Some important catalysts for WDC include the company selling or spinning off one of its product segments.
Trading in the $35-40 price range, WDC looks undervalued on the basis of consensus-projected FCF and earnings growth, and could regain the pre-COVID level of $70s or higher.
Interestingly, Scion Capital has built a large long call option position in WDC. Michael Burry’s similar bet on Maxar Technologies (MAXR) had reaped him over 100% gain.
