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:
- 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.
- 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.
- 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.