Shares of Western Digital (NASDAQ:WDC) are ripping higher on Monday. That’s as WDC stock closed up 11%, despite an overall stock market that was just above flat for the session.
The rally comes as talks between Western Digital and Kioxia are in progress. Reportedly, the two sides are gaining momentum in their merger talks.
Western Digital also has a joint venture with Kioxia, so a merger between the two firms could go rather smoothly. Not to mention, there are some obvious synergies and overlaps between the two firms. As such, it would not be surprising if the deal received some antitrust pushback from regulators.
According to the reports, “under the transaction being discussed, the new company would be 43% owned by Kioxia and 37% owned by Western Digital.” Further, “the remainder by existing holders of the companies.”
A deal should not be too surprising at this point. Not only was it reported on at the beginning of the year, but activists have been pushing to unlock value.
Specifically, “Activist investor Elliott Management, which owns convertible preferred shares in Western Digital, has pushed the U.S. company to split off its flash-memory business from its hard-drive division since investing in the stock in 2022.”
Additionally, Elliott is also a shareholder of Toshiba (OTCMKTS:TOSYY), a firm that owns 40.6% of Kioxia.
Diving Deeper on WDC Stock
While WDC is trading nicely today and hitting a one-month high, the stock has been highly volatile so far this year. A glance at the year-to-date metrics shows that the stock is up 15.5% so far in 2023. However, that’s slightly misleading as shares are down almost 20% from this year’s high.
The year-to-date gain for WDC stock is about in-line with Seagate Technology (NASDAQ:STX). Its competitor is roughly the same size from a market capitalization perspective and both names have struggled over the past year. Western Digital is down about 37.5%, while STX stock is down almost 25%.
One problem? While Western Digital stock trades at less than five times last year’s earnings, consensus expectations are not good for 2023.
Analyst expect the company to lose about $3 a share this year, while revenue is forecast to fall by about one-third. Under those circumstances, one can see why WDC stock has been struggling. They can also see why a merger may create value for long-term shareholders.
The NAND and DRAM businesses can be notoriously sensitive to economic developments. Thus, the stocks can be volatile and often command low valuations. For investors, owning WDC has also been tough when considering how well other semiconductor stocks have performed.
Specifically, Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) have done quite well.
Either way, investors will be looking to see if more upside can be squeezed out of WDC stock on the hopes a completed merger with Kioxia.
On the date of publication, Bret Kenwell 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.
