In January, Western Digital Corp (NASDAQ:WDC) beat on top- and bottom-line earnings results. The quarter was impressive as revenue grew 9.2% year-over-year. WDC stock trades at a low valuation and according to analysts, has plenty of upside.
But is Western Digital stock the best stock in the group to buy? That might be Micron Technology, Inc. (NASDAQ:MU) instead.
Make no mistake about it: WDC stock is solid. It’s just that Micron trades with a lower valuation, has better growth prospects and in my opinion, has a better-looking chart.
But first, let’s take a look at Western Digital stock a little more closely:
Breaking Down WDC Stock
Trading at just 6.5 times 2018 earnings, Western Digital is incredibly cheap. What can we expect for that type of valuation? If it was a name like General Motors Company (NYSE:GM) or Ford Motor Company (NYSE:F), we could expect little to no growth, but a big dividend yield in excess of 4%.
Western Digital stock is somewhere in the middle. It pays out a respectable 2.2% dividend yield, but should have explosive earnings growth this year. Consensus expectations call for 53% earnings growth on approximately 7.5% revenue growth for 2018. However, current estimates also call for an 8.7% earnings contraction in 2019, despite revenue growth of 2.9%.
Given that flash memory prices have already been pressured, it’s no surprise analysts are looking for an earnings decline in 2019.
MU Stock Price
Wouldn’t that mean MU stock is in trouble too then? Not exactly. For starters, more than 70% of the company’s revenue comes from DRAM sales, a market that’s performing better than NAND in terms of pricing. Halfway through its fiscal 2018, analysts have big expectations for Micron this year.
Consensus expectations call for revenue growth of 44% this year and about 4% growth in fiscal 2019. Earnings are forecast to soar 121% this year before receding about 10% in 2019.
However — and this is big — Micron could easily beat these expectations. Going into the second half of 2017, most analysts, investors and buyers of DRAM expected pricing power to erode. Buyers include companies like HP Inc (NYSE:HP) and Cisco Systems, Inc. (NASDAQ:CSCO). But as time has gone on, we’ve seen impressive demand and robust pricing power for companies like MU.
Further, when the company reported earnings in December, Micron not only beat top- and bottom-line estimates, but also provided much better-than-expected quarterly guidance. Before its next report, scheduled for March, it then raised that guidance in early February. Finally in the March quarter, management again provided better-than-expected guidance for the following quarter. In other words, it’s safe to say it wouldn’t be a surprise if current estimates were far too conservative.
Aside from the outlook though, MU stock remains attractive because of its valuation. Shares trade at a paltry 4.6 times earnings. Let that sink in for a minute.
Trading WDC and MU Stock
The average price target on WDC stock stands near $117, which implies more than 28% upside from current levels. The Street-high target from Loop Capital sits all the way up at $145, a whopping 59% above current prices.
So what do the charts say? From July 2017 through March 2018, WDC stock couldn’t break above downtrend resistance (in black). However, after pulling back from its big rally in March, WDC did the bullish thing and found support from this level. Should it hold, it puts the $100 level back in target. Should it fail, the 200-day moving average is its “last line of support” before a fall into the mid- to low-$80s becomes a possibility.
What about MU stock though? You can tell from the 50-day, 100-day and 200-day moving averages that the trend is bullish in MU stock price. After breaking out above $50, we saw a fast move to $62. Despite strong earnings though, shares ultimately pulled back.
The $50 level has become critical. You’ll notice the chart’s pink arrow, which made MU stock look like a “no-brainer” trade — that $50 would be support and a retest of its highs were coming. Shares promptly broke below support after that, bouncing off the 100-day and now climbing back above $50. For bulls to be content, this level has to become solid support.
The average price target on MU stock is near $74, suggesting more than 45% upside from current levels. The Street-high price target of $100 (from Nomura, Rosenblatt and Baird) suggests Micron stock will double from current levels.