Last year was downright horrible for Western Digital (NASDAQ:WDC). And while the tech hardware sector lost almost 16% in 2018, WDC stock sunk almost 55% at the same time.
But yes, it appears that the sentiment was way too negative. So from late December, Western Digital stock staged an impressive rally, up about 31% from its lows.
And the rally was broad-based across the chip sector, as Micron (NASDAQ:MU), Seagate Technology (NASDAQ:STX) and others also had strong moves on the upside. Tech hardware exchange-traded fund SPDR S&P Technology Hardware ETF (NYSEArca:XTH) regained 20.8% since Dec. 24. WDC stock is #11 of the ETF’s 42 holdings, at 2.98% of the portfolio.
2H Pick-Up Seen
OK, then, as for WDC stock, what can we expect now? Are the shares still worth a purchase? Well, it is encouraging that Western Digital CEO Stephen Milligan remains upbeat. In particular, he’s expecting a pick-up in the second half of the year.
One driver is the company’s fairly robust product pipeline. On the earnings call, Milligan noted that it’s the strongest in WDC’s history.
He also said that the company is in the process of a major transition: “In Flash, we continue to lead the industry’s transition to 96-layer BiCS4 technology. We expect broad implementation of this technology across our product portfolio in calendar 2019. We have 96-layer products in customer hands today.”
Cloud Growth Benefits
There are positive long-term trends for WDC stock, as well. Perhaps the most important is the growth in the cloud industry, which is driven by aggressive investments from mega tech operators like Amazon.com (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), IBM (NYSE:IBM) and Oracle (NYSE:ORCL). The software industry is undergoing disruptive changes as customers are moving away from traditional on-premise software solutions.
Oh, and the valuation on WDC stock is still reasonable. Note that the forward price-to-earnings multiple is 9x. The dividend yield is also an attractive 4.13%.
Enough WDC Stock Positives?
So all in all, there are clear positives for WDC stock. But unfortunately, they may not be enough. As we’ve seen in the past, it does not take much to negatively impact Western Digital’s business.
For example, even though the cloud industry looks attractive, there are signs that it may be facing growing pains. Already WDC’s results have been weighed down by lower purchases as inventories have piled up. Granted, management believes this is temporary. But predicting quarterly demand levels can be tough.
This is especially the case when there is growing economic uncertainty. And there is more and more evidence that the global economy is slowing down. Just look at the earnings call with FedEx (NYSE:FDX), where listeners were told: “World trade is slowing, and leading indicators point to positive but ongoing deceleration in trade growth in the near term.”
Yet for WDC stock, the biggest risk factor is China, which represents a major source of demand for chips. During the first two months of the year, there have been drops in the growth rates for industrial output and home sales. This has come after China reported fourth-quarter GDP at 6.6%, which was the slowest pace since 1990.
While there is optimism that the U.S.-China trade talks will come to a resolution soon, this does not necessarily mean things will quickly bounce back. The tariffs have caused a disruption that may have a lasting impact.
In other words, when it comes to WDC stock, there could be more turbulence ahead — and the recent rally may prove to be more of a temporary respite.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.