AI Gold Rush Supercharges Western Digital: Record Orders, Sky-High Margins, and a Storage Boom Through 2027

Western Digital’s latest quarters reads like a clean confirmation that AI is turning storage into a secular growth story rather than a cyclical trade. Hyperscalers scrambling to feed ever-larger multimodal models are buying capacity in bulk and locking it in for years, driving a sharp rebound in nearline HDD demand and pricing power across the complex. Western Digital (WDC) showed it can translate that backdrop into profit and cash, and the print should play well for peers Seagate (STX) and Micron (MU) as the industry leans into higher-capacity drives and disciplined supply. With multi-year purchase orders now in hand and technology transitions (ePMR today, HAMR tomorrow) on track, the company enters the next few quarters with unusually strong visibility.

Against expectations , WDC delivered a clear beat on the top and bottom line. September-quarter revenue was $2.82 billion versus $2.72–2.73 billion expected, up 27% year over year. Adjusted EPS of $1.78 topped the $1.57–$1.71 Street range, and management noted results were above the high end of prior guidance. Gross margin expanded to 43.5% (43.9% on a non-GAAP basis) from roughly 41% last quarter and 37% a year ago, reflecting richer mix, firm pricing, and manufacturing cost improvements. Free cash flow was $599 million, operating cash flow $672 million, and capex a lean $73 million—evidence that the margin recovery is converting to cash. The company returned capital aggressively, repurchasing 6.4 million shares for $553 million and lifting the quarterly dividend by 25% to $0.125.

Demand, mix, and pricing all tilted favorable. WDC shipped 204 exabytes in the quarter, up 23% year over year, with 2.2 million units of its latest ePMR drives (up to 26TB CMR and 32TB UltraSMR) moving briskly through hyperscale channels. Cloud accounted for 89% of total revenue, or $2.5 billion, up 31% year over year—precisely where AI training and inference workloads are densest. Pricing was constructive: management referenced successful channel price increases (though the channel is only 10–15% of revenue), and external checks flagged price per exabyte up about 1% sequentially. Just as important, supply is tight and staying that way by design. Management said they are “not adding any unit capacity,” keeping the focus on density/technology transitions rather than volume expansion—an industry discipline that underpins gross-margin resilience.

Visibility is unusually strong. Seven customers have firm purchase orders extending through the first half of calendar 2026, five cover all of calendar 2026, and one of WDC’s largest hyperscalers signed through calendar 2027. Several agreements carry “financial teeth,” reducing the risk of last-minute pullbacks. That long line of booked business helps de-risk the next leg of the upcycle and suggests exabyte demand will continue to compound at roughly the mid-20s percent pace management cited.

On technology, WDC is accelerating transitions. ePMR remains the workhorse today, while HAMR is progressing toward qualification with at least one hyperscaler in 1H26. Management also suggested there’s headroom beyond 32–36TB UltraSMR over time—no small thing as AI datasets balloon and operators chase lower total cost of ownership via higher platter densities. The manufacturing complexity and longer lead times that come with these capacities are a known challenge, but they also act as a barrier to undisciplined supply growth.

Guidance keeps the momentum intact. For the December quarter, WDC expects revenue of $2.8–$3.0 billion (midpoint $2.9 billion, up ~20% year over year), gross margin of 44–45%, opex of $365–$375 million, and non-GAAP EPS of $1.73–$2.03 (midpoint ~$1.88). Management called out continued revenue growth driven by data-center demand and further profitability improvement as higher-capacity drives comprise a larger share of shipments. With net leverage now just under 1x EBITDA and cash generation strengthening, the balance sheet supports both buybacks and elevated R&D to fund HAMR and related road-map items.

The Street’s reaction mirrors the fundamentals. JPMorgan raised its target to $175 (from $94), arguing that rapidly rising exabyte demand and a disciplined supply posture support a peer multiple on ~$8.80 of annualized EPS exiting CY26. Morgan Stanley reiterated Outperform, lifting its target to $188 (bull case $250) and highlighting durable earnings growth and structural margin expansion. Citi moved to $180 and opened a 90-day upside view, citing strong hyperscale orders through 2027 and faster adoption of higher-capacity drives. The read-through for STX is obvious—Seagate’s strong results already pushed the “bar” higher, and WDC cleared it—while MU benefits indirectly as AI data creation fuels both DRAM/HBM and NAND needs.

Risks remain—tariff/policy volatility, manufacturing complexity at extreme capacities, and the perpetual HDD-vs-SSD mix debate—but management expects HDDs to remain about 80% of bits in the data center for the foreseeable future. With supply constrained, pricing rational, and customers literally pre-paying for runway, WDC’s setup into 2026 looks less like a fleeting spike and more like a multi-year, AI-powered margin expansion story. For a storage company, that’s as close to a mic drop as you get.