After a 4x Surge, Is Western Digital (WDC) Still a Buy or a Sell?

Western Digital (WDC) has experienced a remarkable 4x surge in 2025, driven by surging demand for AI-driven storage solutions and robust capital return policies. As the stock trades at a forward price-to-earnings (P/E) ratio of 23.86-well above the industry average of 17.34-investors are grappling with a critical question: Does the current valuation still justify the company's growth potential?

Valuation Metrics: A Mixed Picture

WDC's valuation appears polarizing when viewed through different lenses. While its P/E ratio of 23.86 is elevated compared to industry peers, it remains significantly below its 10-year historical average of 36.23 according to full ratio data. This suggests the stock is undervalued relative to its own past performance. However, the company's price-to-book (P/B) ratio of 10.24 is starkly higher than the industry average of 0.33 according to stock analysis, indicating a premium valuation relative to tangible assets.

The stock's current price of $181.54 also trades below its estimated fair value of $230.15 according to trading economics, a discrepancy that could reflect market skepticism about sustaining AI-driven growth. Yet, WDC's P/E ratio of 23.86 is considered "good value" compared to its estimated fair P/E of 33.7x according to trading economics, hinting at potential upside if earnings continue to outperform.

AI-Driven Demand: A Tailwind for Growth

The primary catalyst for WDC's surge is its dominance in AI-driven storage markets. In fiscal 2025, the company reported revenue of $9.52 billion-a 51% year-over-year increase-driven by 90% of Q4 revenue stemming from cloud and data center demand according to the latest financial results. High-capacity ePMR drives, including 32TB models, have seen record adoption, with shipments exceeding 2.2 million units in the latest quarter.

Gross margins have expanded dramatically, from 28.1% in FY2024 to 38.8% in FY2025 according to the financial results, reflecting pricing power and cost discipline. Management attributes this to AI's insatiable appetite for storage, particularly for unstructured data. Analysts project continued momentum, with fiscal 2026 revenue growth expected to reach 13.6% according to Yahoo Finance.

Capital Returns: Rewarding Shareholders

WDC's capital allocation strategy has further bolstered investor confidence. The company authorized a $2.0 billion share repurchase program in 2025, repurchasing 9.2 million shares for $702.41 million. Concurrently, the quarterly dividend was increased by 25% to $0.125 per share in October 2025, with a recent hike to $0.13 per share. These initiatives underscore management's commitment to returning capital while reinvesting in innovation and debt reduction according to Nasdaq analysis.

Risks and Considerations

Despite the positives, risks persist. The P/E ratio of 23.86 is still higher than peers like HP (8.71) and NetApp (19.09) according to full ratio data, raising questions about relative value. Additionally, while AI demand is robust, the sector's long-term sustainability depends on technological shifts and competitive dynamics. For instance, Seagate Technology (STX) trades at a P/E of 36.9 according to full ratio data, suggesting WDC's valuation may still be catching up to its peers' optimism.

Conclusion: A Buy, But With Caution

Western Digital's valuation, while elevated compared to industry averages, is supported by exceptional growth in AI-driven storage demand and disciplined capital returns. The company's ability to expand margins, secure cloud market share, and reward shareholders positions it as a compelling long-term play. However, investors should monitor whether the current P/E of 23.86 aligns with future earnings growth. For now, the fundamentals justify a "buy" rating, albeit with caution for potential valuation corrections if AI adoption slows or competition intensifies.