Diversifications will help Western Digital Corporation
Mar 23, 2020 by InvestorDestination Team
The volatile market does present some barging opportunities for long-term investors. We believe Western Digital Corporation(NASDAQ: WDC) is one such opportunity.
Western Digital has exposure to both the HDD and SSD markets and serves both enterprise and consumer segments. The company generates slightly more than 50% of the revenue from HDD and remaining from SSD. In HDD, it also offers products for overcapacity market.In 2016 the company acquired Sandisk to gain exposure to the SSD market. That acquisition increased the company’s debt and goodwill. It helped the company generate strong cash flow for a couple of years. However, last year WDC was under loss due to NAND overcapacity. Its losing streak might continue into this year also.
| 2015 | 2016 | 2017 | 2018 | 2019 | TTM | |
|---|---|---|---|---|---|---|
| Revenue (in Billions) | 14,572 | 12,994 | 19,093 | 20,647 | 16,569 | 15,582 |
| HDD Revenue % | 56% | 52% | 53% | 58% | ||
| SSD Revenue % | 44% | 48% | 47% | 42% | ||
| Revenue Growth | (4%) | (11%) | 47% | 8% | (20%) | |
| Operating Margin | 11% | 4% | 10% | 18% | 1% | (8%) |
| FCF % Sale | 11% | 11% | 15% | 16% | 4% | |
| Debt to Asset | 15% | 44% | 46% | 38% | 40% | 38% |
| EPS | 6.18 | 1.00 | 1.34 | 2.20 | (2.58) | (4.08) |
| Dividend | 1.8 | 2.0 | 2.0 | 2.0 | 2.0 | 2.0 |
A month ago, memory players were concerned about supply constraints due to COVD-19 in China. Now the biggest concern is the demand side. The current global pandemic will put a brake on the global economy. A recession will negatively impact consumer spending. However, social distancing has spurred the stay-at-home economy. There has been a strong demand for servers to support e-commerce, video streaming, e-sports, teleconferencing, and collaboration platform applications for people avoiding leaving home or undergoing quarantine. The increased demand for servers and datacenters will benefit the demand for memory. According to some channel distributors, DRAM and NAND flash memory demand for server and datacenter applications has started picking up and surging recently, despite weakness in demand for PCs and consumer electronics products.
Memory is a cyclical industry. When demand falls, players try to gain a competitive edge by decreasing prices sharply. Apart from that, memory players tend to run fabs at full capacity, even when demand dropped, because their fixed costs (including depreciation) were high. This practice resulted in severe oversupply when the market slowed, putting prices and margins under pressure. For example, as we mentioned earlier, NAND flash prices have fallen significantly in the last two years. In October, the company indicated that it is optimistic that NAND chip prices would rebound this year. Now an external shock has created uncertainties. The sudden shock might dampen the demand, and will negatively impact Western Digital.. Depending upon the severity of the downturn, it might have to write-down goodwill impairment. However, the external shock will not cause a structural change, and the long-term bit capacity growth should continue.
The long-term demand for memory will continue to grow. The company has exposure to both the SSD and HDD markets. It has debt but generates strong cash flow and pays a dividend. It might be a bumpy ride, but it is worth considering.
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