Investors in the technology sector who held semiconductor stocks because of the super-cycle are getting richly rewarded.  Memory and flash storage prices are holding up, thanks to strong demand and limited supply. Yet where device makers buy up more memory and flash components, the markets also need more storage. Investors recently recognized the potential for Western Digital Corp (NASDAQ:WDC), bidding the stock up from a low of $80 in February to over $100 a share in March. Not only are valuations still favorable for WDC stock, but the company’s prospects this year are still strong.

Western Digital is addressing the diverse market by balancing its product mix to meet end-market demands. It made a number of mid-range product announcements at the start of the year. This includes hard drive capacities that address enterprise market needs. In both the high-end and mid-range market, the company expects higher consumption of storage this year. The long-term story is unchanged: annual exabyte demand will grow 40 percent.

To keep its profit margins high, the company cut expenses in the second quarter with lower investments in its enterprise drives, along with narrowing its client HTD portfolio. Western Digital also closed manufacturing plants in China and Singapore.

Yields for its 64-layer 3D flash technology called BiCS3 is progressing favorably. Yields are improving and the mix of 3D flash bit supply is getting to the 70-percent level. In the current quarter, it started shipping the 96-layer BiCS4. Once Fab 6 starts, which is soon, the ramp up for BiCS4 will result in higher bit output. Western Digital targets the current third quarter for this happening.

Minimal Headwinds for Western Digital Stock

Just as memory and computer chip markets are cyclical, so too is the storage market. Management expects that although bit growth will keep going up with manufacturing yields, the market will still normalize. The normalization for flash markets is inevitable and happens in the life cycle for products. This still benefits the industry because it creates new opportunities for flash. In the near-term, supply is constrained, which implies higher profits ahead until demand tapers or competitors raise output.

Western Digital’s fiscal second quarter’s inclusion of a $1.6 billion charge at first spooked its investors. Fortunately, this is a repatriation tax charge that is only one-time and is mandatory. The company will pay the tax, spread over the next year and beginning in fiscal 2019. This will allay investor fears of any foreseeable liquidity crunch. Speaking of cash flow, the company generated $1.2 billion in operating cash flow, up 12 percent from last year. It ended the quarter with $6.4 billion in cash and equivalents.

Sustainable Profitability for Western Digital Stock

Western Digital management confidently believes that it will sustain a gross margin in the range of 33 to 38 percent for this year. Even if ASP (average selling price) declines, the company planned for cost reductions of 20 percent annually. On the revenue side of the equation, the NAND market continues to feed Western Digital’s growth. This is a high-end market that will keep growing in the 35 to 45 percent range in the long-term, just as it has historically.

Flash is clearly a positive contributor to Western Digital’s elevated gross margins. This probably gives analysts confidence that the stock has plenty of investment upside. Tristan Gerra of Baird set a $135 price target on the stock, citing DRAM contracting pricing increases and stable NAND markets.

Analysts, on average, have a nearly $114 price target on Western Digital stock. This target valuation is conservative because the stock trades at a price-earnings ratio of below 16 times. For a company growing revenue at a brisk pace, the stock will suit value investors looking for a consistent performer.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.