In some unusual cases, a rival manufacturer’s strategic pivot ends up helping its rivals, as Western Digital (NASDAQ:WDC) learned Monday. Amid a soft session on Wall Street, WDC stock jumped about 8% higher on the announcement that Samsung will cut its memory chip production. Naturally, the move should help ease an industry-wide supply glut. Further, the news fortuitously boosted Western Digital amid its own struggles.
Bloomberg reported that at the end of last week, Samsung would cut production to a “meaningful level” after reporting its smallest profit in more than a decade. Although semiconductor demand soared during the early fallout of the Covid-19 crisis (mainly due to a shock supply constraint), consumer headwinds such as skyrocketing inflation eventually dampened sales.
Now, chip manufacturers must be conscious of correcting supply-demand dynamics. Therefore, the semiconductor community greeted Samsung’s disclosure with much enthusiasm. While much attention centered on WDC stock, other downwind beneficiaries such as Micron Technology (NASDAQ:MU) also jumped higher.
Notably, Bloomberg reported that Samsung had earlier resisted pulling back on production in a bid to take market share from rivals. However, the company’s about-face “adds light to the tunnel,” according to Stifel analyst Brian Chin. In a research note, Chin added that the move may “help turn around the largest memory supply imbalance in decades.”
WDC Stock Gets a Much-Needed Boost
While semiconductors broadly benefited from Samsung’s production cut announcement, it extended a critical lifeline to WDC stock. According to Yuanta Securities’ analyst Gilhyun Baik, prices for dynamic random-accessory memory (DRAM) chips may fall about 10% in the current quarter. This follows a slide of roughly 20% in the previous three months.
Conspicuously, data from Gurufocus reveals that Western Digital’s net margin on a trailing-year basis slipped to 0.59% below breakeven. This stat ranks worse than 71.45% of companies in the tech hardware industry. Western Digital’s three-year revenue growth rate is also only 1.6%, worse than nearly 57% of the competition.
Moreover, WDC stock suffers from enterprise-specific woes. Earlier this month, Western Digital revealed that it was investigating a network security incident. Per Reuters, a breach in some systems disrupted parts of its business operations.
“The unauthorized party obtained certain data from its systems, and Western Digital is working to understand the nature and scope of that data, the company said in a statement,” the news agency reported.
Although WDC stock gained robustly on Monday, it’s up less than 1% in the past five sessions. Therefore, the Samsung news couldn’t have come at a better time. Otherwise, the network breach may have dominated investor sentiment.
Why It Matters
Although the broader semiconductor industry struggled from last year’s troubling headwinds, analysts remain optimistic about WDC stock. According to TipRanks, Western Digital carries a consensus “moderate buy” view. Also, Wall Street’s average price target is $45.33, implying nearly 20% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
