Western Digital (WDC), like any other company has suffered due to the falling PC sales. However, it has very vigilantly attempted to diversify its risk by investing in emerging technologies like hybrid storage, cloud, and big data that would position it in a much safer situation in the changing dynamics of the industry. It thus shows a good future for the company, consequently making it a good long term buy.
Western Digital (WDC) is an American storage device manufacturer that primarily produces hard disk drives. Western Digital along with its chief rival Seagate (STX) dominates the storage devices industry. In addition to the conventional hard disk drives (HDD), Western Digital also produces Solid State Drives (SDD) that are expected to replace HDDs in the future, but that is still a long way to go since SDDs are not nearly as cost-efficient as HDDs. In addition to that, Western Digital has introduced a newer, better, and more cost efficient Hybrid tiered storage technology that could greatly benefit the company in the years to come. Western Digital has also invested in big data and cloud storage, which are emerging as the storage technologies of the future.
In early 2012, Western Digital acquired Hitachi Global Storage Technologies (HGST) which has made Western Digital the largest traditional hard disk drive manufacturer in the world. Fabrication of Western Digital chiefly takes place in Thailand.
The PC industry has been experiencing a continuous decline of approximately 20% year-over-year, which has affected a number of companies having direct and indirect stakes in the PC industry. The decline in the PC market has in effect caused a decline in demand for computer hard disk drives, which has also had its effects on western digital, being the market leader in the HDD segment. Although that negative effect has been covered by an increase in Western Digital's market share in the market appropriate to its acquisition of HGST, nevertheless, its impact has not gone unnoticed. The company has suffered a total revenue drop of 21% year-over-year in the previous quarter; however, an encouraging side of the story is that Western Digital's revenue from non-PC related sales grew to a good 51% of total sales. This shows that instead of succumbing to the falling PC market, the company has effectively focused its attention to areas that could shelter it from the downside associated with the PC market.
The growing tablet and smartphone markets also hold enormous opportunities for technology companies. A couple of years ago, Western Digital had no presence in the handheld industry, however, it has made substantial efforts to tap into this market through its solid state drives (SSDs) which are used in handheld devices for data storage coupled with high speeds and small sizes. The company has made four SSD related acquisitions to enable its tapping more effectively into the smartphone and tablet market, one of them importantly being the acquisition of sTec by HGST which would enable Western Digital to adjust to the expanding SSD market.
Another way for Western Digital to survive the plummeting PC market is if it attends to the cloud as well as big data, which are emerging as the storage technologies of the future. Western Digital forecasts these two markets to grow at an annual rate of 34% through 2020 which holds a lot of promise. At present, these two segments of the storage industry hold a very little part in Western Digital's revenue, however, the company aims to build on it and benefit from the growing data market in the future, which would help it survive the changing trends in the industry.
Western Digital's newly introduced hybrid tiered storage technology could prove to be a huge success for the company. This technology combines the pros of both HDDs and SSDs to make a high capacity storage device that is fast, efficient, and inexpensive, with low power consumption and superior performance. This new efficient technology is applicable to not only computers and notebooks, but mobile devices too. Thus the new hybrid storage could prove to be a safe investment for Western Digital that could prove as a cushion to the changing trends and demands in the industry.
As is the case with every industry, stagnation is a killer, and unless there is constant innovation by a player, it could very well say goodbye to the industry. Another part of the theory is when industry dynamics cause shifts in the nature of products. The demand for storage is increasing every single day, and the industry could never die out, however it could shift from one kind of a storage system to another. In the next 20 years HDD might be completely overtaken by cloud storage, and companies complying with such shifts would be the ones to thrive.
Is it a good buy?
Western Digital has experienced a growth of more than 100% in its share price in the previous 14 months, especially after the HGST acquisition. Thus many investors could think that currently Western Digital's stock could be trading at peak valuation. However, Western Digital is still reasonale at a meager 7.69x of its next year's earnings, against an industry P/E of 14x, and that of the sector being 26x.
The recent acquisitions that the company made to better adjust to the changing market dynamics in addition to the focus it is putting into product innovation shows that the company is prepared to take on the challenges that the industry is facing today. The previous quarter showed that the company's non-PC related revenues went up by a sturdy 51% which shows how WDC has attempted to buffer its situation against the plummeting PC market.
Also, investors might argue that the HDD market would be giving in to the faster and efficient SSD market, however they might fail to realize that there is still a long way for SSDs to go to replace HDDs considering the higher price tag and lower storage capacity they carry in comparison to HDDs. Additionally, there would always be the opportunity to make HDDs better through offering ever increasing storage capacities which would never go out of demand considering the pace at which the demand for data storage is increasing.
A major part in Western Digital's overall decline in revenues is due to a decline in supply after the floods in Thailand affected its manufacturing plant as well as a number of players involved in the supply chain. Its sales are expected to normalize once the facility in Thailand becomes fully functional and the company starts meeting the demand of its products.
All factors taken into account, Western Digital still looks full of promise and could show a further increase in its share price.