Western Digital Corp Stock Is a Sell Going Into Earnings

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WDC - Western Digital Corp Stock Is a Sell Going Into Earnings

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In November, a prominent analyst came out against Western Digital Corp (NASDAQ:WDC) stock, and the equity fell hard on the news. The stock has since recovered most of those losses.

Now, with the upcoming earnings announcement on Jan. 25, investors will gain better visibility on the direction of the company. Still, with memory pricing reaching a peak and future estimates turning negative, the announcement will likely not give investors a reason to buy WDC stock.

Effects of Earnings Report Will Likely Be Short-Lived

To be sure, the stock could surge after the earnings report. It has performed poorly versus its archrival in the hard disk drive (HDD) space, Seagate Technology PLC (NASDAQ:STX). WDC and STX usually move in lockstep. However, year-to-date, STX has risen 27%, WDC only 8%.

Seagate’s rise could have been driven by its stake in the digital currency Ripple. Also, since STX already announced its earnings, Seagate may have enjoyed its bounce early. Still, once this announcement fades into the past, WDC’s challenges will likely become important. The problem plaguing the stock is the likely peak in NAND memory prices.

Western Digital’s troubles began in late November when Morgan Stanley stated that NAND memory prices were peaking. All three divisions of WDC rely on NAND memory. Hence, this report sent WDC and its peers reeling. Over the next week, Western Digital stock lost as much as 17% of its value.

I proposed in an earlier article that a peak in NAND memory prices was a signal to sell. The stock recovered somewhat in mid-December when WDC and Toshiba Corp (USA) (OTCMKTS:TOSYY) resolved its dispute over the sale of TMC. Despite the Toshiba deal and a rise in the general market, I stand by my earlier theory.

Memory prices hold an inescapable influence on WDC. Like its peer in the memory business Micron Technology, Inc. (NASDAQ:MU), WDC stock tends to rise and fall on memory prices. Unlike Micron, Western Digital has little involvement with DRAM memory, whose prices have not yet peaked.

Profits Have Likely Peaked for WDC Stock

The NAND memory shortage had been good to Western Digital. Over the last year, memory prices have trended upward. Between the middle of 2016 and mid-2017, the WDC stock price surged by 170%. After July of last year, it stalled. Now with the end of the NAND memory super-cycle, profits also appear to have reached a peak.

Analysts forecast profits to peak for fiscal 2018, with consensus Wall Street estimates placing 2018 earnings at $12.21 per share. However, they believe profits will fall by about 10% in each of the next two years as memory prices weaken.

In my view, this serves as a signal that the super-cycle in WDC stock has also ended. Both Western Digital and its peers have a long history of falling stock values when memory prices peak. Between mid-2014 and early 2016, the equity lost more than half of its value as the decline in solid state drives (SSDs) hit WDC hard.

The company turned this around by capitalizing on the then-new trend toward NAND memory. Now with NAND memory becoming cheaper, the company will probably need to find a new offering to bring buyers back into the stock.

Final Thoughts on WDC Stock

Volatile memory pricing has again turned on Western Digital stock, indicating the time has come to sell. Coming off the decline in SSD memory in 2016, the stock recovered as it rode a wave of popularity on NAND memory.

Unfortunately for WDC investors, the NAND trend appears to have hit its peak. The fall in NAND memory prices will hurt revenue and earnings, and by extension, the company’s stock.

Due to the rising trend of increasing equity prices in the stock market, shorting remains dangerous. And the stock may ride its current trend through earnings and for a short time after that. However, once investors notice a decline in profits, WDC will again sell off. Investors should get out now.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/western-digital-stock-is-a-sell-going-into-earnings/.

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