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Western Digital Has Meaningful Downside Protection, But Limited Upside

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DTF Capital


  • Western Digital is navigating through the trough of the cycle successfully as it remains free cash flow generative.
  • 2019 promises improving margins and average selling prices for HDDs and SSDs.
  • However, Micron, a related player in the data management sector, is a better bet.

Investment Thesis

Western Digital (NASDAQ:WDC) makes hard disk drives (HDDs) and solid-state drives (SSDs) or flash-based memory. The latter product is manufactured under a joint venture with Toshiba Memory Corp (TMC).

Operating since 1970, the company has navigated successfully through the cyclicality of the industry. Currently, WDC is experiencing the down cycle of the industry, and arguably the bottom is about to form. In just a few quarters, the whole sector looks likely to revert to growth. Unsurprisingly, since the start of the decline, WDC remained highly profitable and committed to returns cash to its shareholders through its 5% dividend yield and buyback. Nevertheless, we are witnessing an ever more competitive market, and although we feel that WDC is a good bet in the industry, its economics are not as strong, and its margins will not expand as fast as others. We feel Micron (MU) is a safer bet.

Source: WDC, 10-K, 2018, Segments

Worst of the cycle has arrived

Before comparing with Micron, let’s have a look at what WDC has gone through and what have they done to deserve a substantial share price performance discrepancy to Microns.

Source: Yahoo Finance, Jan 2019 price chart

The peaks and troughs of the semiconductor cycle are clear from looking at the chart above. The cycle is identical at the other HDDs producers, Seagate (STX), Samsung (OTCPK:SSDIY), and Toshiba (OTCPK:TOSYY). And similarly, at the SSDs players: SK Hynix( OTC:HXSCF) ( OTC:HXSCL), Micron and Intel (INTC).

Although Micron is not the perfect like-to-like comparison to WDC as half of WDC’s revenue comes from HDDs, whereas Micron focuses on SSD solutions that combine DRAM and NAND. Nevertheless, they both compete to design and manufacture solutions for the future of data management. Both also supplies storage and memory solutions to data centers, PCs, and embedded business units. Finally, we feel investors in WDC

This article was written by

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I run Sleep Well Investments to find time-tested and anti-fragile businesses to help you avoid permanent capital losses - the first rule of investing. All businesses go through a comprehensive review, I call it a ‘sleep well investment’ checklist, to evaluate their (i) business quality, (ii) competitive position and risks, and (iii) valuation. They are given a score and a trigger (buy) price to ensure a high margin of safety.The first few write-ups are: The VAT Group - The Vaccum Valve Monopoly Shimano - The Bike Component Monopoly Floor and Decor - Future Home Improvement Monopoly Subscribe for more sleep-well investments.

Analyst’s Disclosure: I am/we are long MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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