Western Digital: Time to Sell?

Back on June 22^nd 2007 and July 27^th 2007 I predicted that Western Digital (WDC) would make a move into the 20s. I ended up selling WDC late last year because a number of analysts were pushing the stock back down to the low 20s (probably so they could buy more).

There was mention of inventory being too high and solid state drives would be a thing of the past as flash drives would overtake the market. Well, I guess they were misguided. This stock has since mushroomed to almost $39 a share. And solid state still has an enormous lead as flash memory is still too expensive.

I believe inventory will get ahead of slightly inflated sales projections towards the fall season. The almost, but not necessarily, recession should start to hit personal computer, laptop, and digital video recorder sales later this year as inflated oil and high food prices have caused deflated wallets, and as a result discretionary spending will continue to decline throughout the rest of 08. DVR sales may continue to rise…but that’s because cable and satellite operators are practically giving them away, which means decreased margins for companies like WDC. PC and laptop prices continue to decline as well. I can buy two laptops for what one used to cost in 1995.

Now the last time WDC nearly crashed in 2002, I - the then misguided investor - was left holding the bag. Inventory was a big issue back then for WDC and I predict the same thing will happen again. This company is still very well run and has a bright future; they just need to keep growth and inventory in check. Oh…and a dividend would be nice.

 

Disclosure: none

 

Comments

[davcnslt:]

Hi mark,
many thanks for your notes on WDC. First I wanted to correct a misuse of terms:
"solid state drives would be a thing of the past as flash drives would overtake the market"
Actually solid state drives and NAND flash drives are similarly used. An exception is that the term "solid state drives" would also refer to "drives" that consist of RAM memory as well. In addition, with regard to your thesis, today there is little sign of WD growing inventory, nor is there any reason to believe that inventories would grow in the prime buying time normally associated with the back half of the year. In fact, since mid year last year the HDD industry has been markedly restrained in terms of controlling inventories and prices. During the stronger buying season of the back half, we could expect pricing to remain solid. For my money it is too soon to sell WDC. The stock still sells at attractive multiples, guidance is solid, and WD has been banging on all cylinders. With recent updated forecasts from both Gartner and IDC reflecting PC growth of 10% with the more brisk buying still to come, I believe shareholders are better served holding or even chasing a little. WD's execution in the fastest growing segment of the HDD business, the 2.5 inch mobile sector is really quite phenomenal.

2008 Jun 05 08:53 AM

[zidan:]

As a PC enthusiast I can tell you flash/solid state drives have been a bit of a disappointment in both the price and performance categories. It will be a long time before WD becomes unprofitable, especially considering all the PC's out there that need their drives when their owners want to get more capacity for their digital media without opting for a new computer. WD is also the market leader for performance drives for the gamer/home enthusiest market segment with their Raptor drives and have a good brand going in this area

2008 Jun 05 10:58 AM

[Marc Forgang:]

Gary, thanks for your comments. Just to clarify, by flash I mean USB flash. There has been discussion for some time of USB flash overtaking solid state (RAM) drives. Analysts may be misinformed as you seem to have more knowledge then they do. I am going by the terms analysts have used. In addition WDC has a history of overstating sales projections, better to surprise every quarter instead. Keep in mind that even if inventories stay in check, pricing pressure will continue as PC, laptop, DVR prices continue to drop. I have invested in and followed this stock for over ten years. This is why I said to hold some and take some profits. Thanks.

2008 Jun 05 04:57 PM