Western Digital (NASDAQ:WDC) had a rotten 2018. WDC stock lost more than half its value, plunging 53.5% for the year. That made it the seventh-worst performer in the entire S&P 500. This year is not off to much better of a start. WDC is up just 2% so far, compared to far bigger gains for the market and tech stocks in particular.

It’s not hard to see why Western Digital stock has crashed. The company’s hard disk division continues to fade in importance, while the flash memory business is facing cyclical pressures and strong competition. But at 6x earnings, there has to be a bullish case for WDC stock here, right?

Let’s look at the optimistic and pessimistic views on Western Digital stock.

The Case Against WDC Stock

The bearish case on Western Digital is pretty simple. The company dominates in the traditional hard disk drive “HDD” market, but has far less market share in the increasingly popular solid state drive “SSD” category.

This is a major problem, as Western Digital is far more profitable in the HDD market. For now, HDD drives still have a major cost advantage versus SSD. But the price of SSD continues to plummet.

SSD is more attractive as it has the advantages of using no moving parts, consuming less power, and taking up less space. As HDD’s lower price becomes less and less of a factor, SSD will gradually take over its remaining applications.

In HDD, it’s just Western Digital and Seagate (NASDAQ:STX) making up more than 80% of the market. Over in SSD, it is far more competitive. Samsung is the leading player. However, no one has more than 25% market share, and there are more than a dozen active competitors.

Western Digital made its Sandisk acquisition to try to muscle into the SSD space. But so far, it has not shown any sort of cost or technological edge that would enable it to earn consistent higher profit margins, as it has been able to do in HDD.

As the market continues to shift from HDD to SDD, Western Digital’s profits will decline as it loses its high margin business and ends up fighting a price war with Samsung and others in the SDD arena.

The Case for WDC Stock

Bears argue that the erosion in the HDD market combined with too much competition in SSD will doom Western Digital stock. On top of that, it appears the cycle has turned downward for memory as well. In the past, down cycles have led to huge erosions in profit margins for the storage players.

Bulls can credibly respond, however, that this time will be different. Now, unlike in the past, memory demand is growing much more slowly. This limits how far the industry can get out of whack from a supply/demand standpoint this time around.

Even assuming profits are going to drop from both HDD and SSD, how far realistically could they fall? The company, backing out one-time items, is trading around 5x trailing earnings and under 6x forward earnings.

With earnings in the $6/share area, even a moderate earnings shortfall hardly makes WDC stock look expensive at $37. On an EBITDA basis, the company is selling for under 4x. You rarely see companies sell for under 5x EV/EBITDA – or 6x earnings for that matter – unless the business is dying.

While HDD is fading, it won’t fully go away all that soon, and Western Digital has a defensible position in SSD as well, even if it isn’t as profitable.

WDC Stock’s Dividend: Can You Trust It?

While it didn’t matter much when Western Digital traded up at $100, the dividend has now become very interesting. WDC stock offers $2/year (50 cents per quarter) in dividends.

When WDC stock was riding high, that amounted to just a 2% yield. With WDC stock now under $40, however, the dividend yield is greater than 5%. It’s hard to find tech companies that will pay you that well to hold their shares.

However, not all is well with the dividend. Investment bank Evercore downgraded WDC stock to underperform earlier this week. WDC stock got mauled following the downgrade as Evercore didn’t just speak negatively of the company’s outlook, it specifically warned about a dividend cut.

Evercore suggested that the company’s free cash flow of just $2.35/share for this year barely covers the $2.00 dividend obligation. Combined with $6.5 billion in debt after factoring out cash, Evercore’s analyst suggested that there was “clear risk” to the current dividend payout. For what it’s worth, Evercore also cut its price target to just $30, suggesting another 20% downside from here.

WDC Stock Verdict

It’s understandable why the market has punished Western Digital stock so dramatically. The company’s cash cow traditional hard disk business is in steady decline. Over time, it will become obsolete.

Western Digital wisely made a big move into flash memory to reinvent itself while it still has strong cash flows. Unfortunately, the SSD market is currently on a downswing, which will limit Western Digital’s profits over the next few quarters.

On the balance, however, it’s easier to side with the bullish arguments. Western Digital clearly still makes a ton of money. Look at the forward PE ratio of 6 even with 2019 shaping up to be an off year.

When the cycle turns back up, it’s hard to imagine that Western Digital can’t get back to at least an 8x or 9x PE ratio, which should put the stock at $50 or higher. On top of that, you have the strong dividend (though it could be cut) and a share buyback program to support the stock price.

WDC stock is clearly a falling knife at this point. But for the brave, this entry point could lead to strong returns over the next 12 to 24 months.

At the time of this writing, Ian Bezek held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.