Why Shares of Western Digital Corporation Got Slammed Today?
May 01, 2020 by InvestorDestination Team
After Western Digital Corporation (NASDAQ: WDC) announced its Q3 results its shares plunged almost 14%. Its third-quarter revenue grew 14% year-over-year. Compared to last year, its margin and profitability improved. Its gross margin is 24.1% compared to the previous year's 15.8%, and it generated 0.06 EPS compared to last year's loss of 1.99/share.
Now, the company is suspending dividend and focusing on improving its debt level. While the company is upbeat about the demand from data centers, it expects headwinds due to retail store closures. So the company is facing near-term uncertainties.
Last year was challenging for the NAND market. The revenue growth and margin improvement need to be taken with that context.
The SanDisk acquisition raised Western Digital's debt level. Immediately after the acquisition, the company did generate strong cash flow and could have improved its balance sheet. Repurchasing shares during an upturn and tightening the belt during a downturn is not the right strategy. But many companies repeatedly use that strategy. Like many companies, during the upturn, Western Digital repurchased its shares and paid dividends.
Recently, the CFO mentioned that the company wants to deleverage its balance sheet before entering the next downturn. Now, COVD-19 is triggering that downturn, and the company is forced to improve its balance sheet. We would have preferred if the company improved its balance sheet before entering this downturn, but at least now it is prioritizing to strengthen its balance sheet.
In the near-term, data centers are increasing their capital spending to accommodate the increased demand due to e-learning and more people working from home, which will positively benefit WDC. However, the economic slowdown will negatively impact consumer spending and might eventually spread to enterprise spending. The recent stock rally indicates that inventors had forgotten about current uncertainties, and the company's actions show that it is not the case. However, in the long run, 5G, autonomous vehicles, and cloud computing will continue to drive the demand for memory.
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