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Western Digital (WDC) stock popped today on the company's improved estimates for the full year and the belief that the company now enjoys "duopoly" status with Seagate in hard drives.

The question investors should ask is, is this overdone?

Assuming the company can meet its announced earnings target of $10/share, that would give it a forward PE of 4, with its present price of about $40. That's Ford-like.

Seagate (STX) is up 12% in sympathy with WDC's improvement, again based on assumed duopoly status and the fading of the pain from last year's floods in Thailand.

But there are reasons for caution:

  1. WDC does not yet pay a dividend. Like tech companies of the past it keeps a ton of cash on hand - $3.77 billion by last count.
  2. Hard drive demand is uncertain. The consumer market is slowly driving up as ultrabooks and tablets use chip memory instead, and expect users to maintain substantial data in the cloud.
  3. How long cloud demand will remain strong is an open question. Right now that area is going through a boom period, meaning demand is growing for hard drives. But the cloud boom could easily turn into a cloud bust, and chip-based systems are coming to the cloud as well.

Investors who held WDC going into this month have done very well, and have a right to gloat. There may even be substantial upside to come, at least over the next year. But I would advise WDC, and its shareholders, to make hay while the sun shines, because there remain clouds on the demand horizon.

Don't buy this stock, put it in a safe and ignore it. Buy it, but keep an eye on it because the fall, when and if it comes, will be sudden, sharp, and total.

Source: Is The Western Digital Pop Overdone?