Western Digital (NASDAQ:WDC) is slated to report Q1 2020 earnings after the market closes on Oct. 30. During a challenging year that has included a NAND flash memory glut and the trade war between the U.S. and China, WDC stock is up 55%.
However, at $58.86 it’s still way off the $106.45 WDC was trading at in March 2018, and over the past month its latest recovery has lost steam. Here’s what to expect from those WDC earnings and how they are likely to impact Western Digital stock.
Q4 2019 WDC Earnings and Q1 2020 Guidance
On July 31, Western Digital released its Q4 earnings. Revenue for the quarter was $3.6 billion with EPS of 17 cents. For the full year, Western Digital was in the red, posting a $754 million loss — compared to a $675 million profit for fiscal 2018.
At the time, the company stated:
“We are seeing signs of improving conditions in the flash market and believe that it has reached a cyclical trough. With continuing expectations for a positive demand environment, a robust product portfolio and expanding customer engagements, we expect to deliver improving financial results as we move through fiscal 2020.”
Guidance for Q1 2020 included a revenue projection of between $3.8 billion and $4 billion for the quarter and EPS that could range anywhere from 15 cents to 35 cents. That Q1 guidance for revenue was in the range analysts were looking for, and the upper end of the earnings was also inline with expectations. WDC stock saw a 3% pop as a result.
NAND Flash Memory Glut Hammered Western Digital Stock
The flash market that Western Digital was referring to is the NAND flash memory that’s used in a wide range of devices, including smartphones, thumb drives and solid state drives (SSDs) for computers. The company got into the business in a big way when it paid $16 billion to acquire SanDisk in 2016.
With demand for its hard disk drives (HDDs) softening as PC manufacturers increasingly opted for solid state storage — especially in laptops — it was a good move for Western Digital. WDC stock climbed 200% between the day the SanDisk deal closed and last March.
However, demand for flash memory is cyclical and Western Digital stock felt the full effect when a glut of NAND flash memory began to flood the market last year. WDC dropped below $36 in December, staging a recovery that lasted several months, up to April.
Q3 earnings that showed the continued price pressure on NAND flash memory worried investors. Worse, in May the trade war with China escalated, with a ban on selling components to China’s Huawei. The prospect of losing one of the world’s largest smartphone manufacturers — and a producer of laptops as well — was another blow to Western Digital, and by mid-June it had given back all of its 2019 gains.
Western Digital is far from the only company that has felt the one-two punch of the NAND glut and the trade war. Micron (NASDAQ:MU) is an American chipmaker that’s highly reliant on NAND memory (as well as DRAM) for revenue. MU has followed a very similar trajectory to WDC stock, spiking early last summer before going into a free fall, staging a recovery in early 2019 only to see that collapse through May. Like WDC, MU has been climbing again in anticipation that the global memory glut will end.
Will Q1 2020 WDC Earnings Reassure or Disappoint?
As its Q1 earnings date approaches, analysts are split between being cautious and optimistic about Western Digital. Half have WDC stock rated as a “hold” and half as a “buy,” and that reflects the uncertainty around the company’s market.
If Western Digital’s Q1 guidance was accurate and NAND memory demand (and price) is starting to bounce back, then those WDC earnings will reflect it. Stronger than expected sales of Apple’s (NASDAQ:AAPL) iPhone 11 suggest that demand for NAND may indeed be on the rise. However, throwing a wrench in the works is the trade war with China.
There have been doubts about the deal President Donald Trump announced earlier this month. If that falls through, tariffs on laptops and smartphones are coming — and that would be a blow to Western Digital.
The bottom line is those Q1 WDC earnings are expected to be in line with the company’s projections. But Q2 guidance is likely to set the tone for WDC stock movement, and with two big variables in the NAND market and China, that’s a lot of uncertainty in the mix.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.