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3 Reasons Western Digital Corp Stock Still Is a Good Buy

Western Digital stock - 3 Reasons Western Digital Corp Stock Still Is a Good Buy

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Western Digital Corp (NASDAQ:WDC) has spun its shareholders around as fast as one of its trademark hard drives. At the end of 2012, Western Digital stock went for around $40 share. It whirled up to $110 by the end of 2014. Merely a year later, traders had sent it back to $40/share.

But while Western Digital skipped a few beats, it’s back in sync now. WDC stock powered up to $105 earlier this year, and is sitting around the $90 level now. What are investors to make of this elevated volatility?

Bulls rightfully point to Western Digital stock being a cheap one in an expensive market. Unlike a chief rival, Western Digital pays a nice dividend, and it also has more upside if the industry cycle keeps going well.

On the other hand, bears say that rival, Micron Technology, Inc. (NASDAQ:MU) is even cheaper and that Western Digital is more exposed to NAND pricing. Plus, tech stocks as a whole have hit a rough patch. Let’s break down the arguments.

WDC Stock Cons

Pricier Than Micron: As Investorplace contributor Laura Hoy noted, WDC stock is trading at a higher valuation than Micron. She wrote: “A brief glance at the numbers will tell you that MU is remarkably cheaper.

Western Digital stock trades at nearly 16 times its earnings vs. Micron’s 9.48 P/E ratio. Looking into the future, the disparity is there, although less apparent. WDC has a forward P/E ratio of 7.36, while Micron’s forward P/E comes in at just 5.87.”

Obviously both of those forward PE ratios are rather amazing. But for the most bang for the buck, Micron stock is the winner. Plus, arguably, Micron is exposed to better business segments going forward, since it doesn’t have the heavy exposure in hard disks to worry about.

NAND Prices Peaking: It’s becoming common sentiment that NAND prices are topping out. Ambrish Srivastava of BMO Capital Markets recently explained: “Trade NAND revenues and margins both declined in the quarter. ASP came in well below what we were modeling for.”

That’s a problem for both Western Digital and Micron. However, arguably, Micron can still grow earnings due to its DRAM business. Western Digital, on the other hand, is likely going to hit peak earnings in 2018 and start trending back down thereafter.

Tech Stocks Struggling: After several years of rather dramatic outperformance, tech stocks are reversing course. The reasons aren’t specific to Western Digital or Micron for that matter. Facebook, Inc. (NASDAQ:FB) is stuck in a major scandal.

Tesla Inc. (NASDAQ:TSLA) has been plunging following a fatal crash involving the company’s autopilot. And President Trump may be taking aim at Amazon.com, Inc. (NASDAQ:AMZN) for supposedly abusing their market position.

Regardless of the reasons, tech stocks are sinking. Given the rise of passive investing in broad ETFs, it is hard for a company like Western Digital to escape the broader tide.

Unless you have a passionate shareholder base, your stock is likely to head in the same direction as your sector. And that could have Western Digital stock moving lower in coming weeks. It’s hard to dispute the fact that tech stocks got a little overheated and are due for a pause.

Fundamentals – such as Western Digital’s attractive PE ratio – eventually win out, but in the short-run, trading sentiment prevails.

WDC Stock Pros

More Upside To Catch Micron: Given the recent drop in Western Digital stock, it’s up just 13% over the past year. Micron stock, by comparison, is up 79% over the past year. Since the companies share a major market, you’d think they’d be trading a little more in tandem.

And that’s not all. The more direct comparison company, Seagate Technology PLC (NASDAQ:STX) is also up 26% over the past year, doubling Western Digital’s return.

Decent Dividend: When owning a highly cyclical company, it’s nice to receive some cash upfront in case the stock turns down again. In this regard, Western Digital is the clear winner of the two. It pays a dividend of 2.2%, as compared to Micron which pays no dividend.

That isn’t to say that WDC stock is solely worth buying for the income. A high-yield stock, this is not. But the dividend is a decent feature for Western Digital as compared with Micron.

That Valuation: Ultimately, the low P/E ratio is the main reason to be interested in either Micron or Western Digital. Few people would suggest that this level of profitability will go on forever. But it doesn’t have to for investors to make money.

A forward P/E ratio of 7 suggests an earnings yield of 13%. Put another way, Western Digital can earn 13% of its market cap in after-tax profits in one year. That’s phenomenal. The company should be able to reward shareholders with a buyback, larger dividend, or new growth initiatives with that sort of income.

Verdict on Western Digital Stock

I recently argued that “bulls still have the upper hand” in Micron stock. With Western Digital stock having underperformed Micron dramatically over the last year, it’s not hard to make the case for it as well.

There’s been a spirited debate here at Investorplace over whether WDC stock or Micron stock is preferable. Perhaps the answer could be simply to own both if you still like the storage and memory markets.

At the time of this writing, the author held FB stock and had no positions in the other aforementioned securities. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2018/04/western-digital-stock-good-buy/.

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