WDC Earnings Preview: High expectations following STX and MU reports

Western Digital (WDC) is set to report its fiscal Q1 earnings after the close on Thursday, October 24, 2024. Analysts are forecasting an earnings per share (EPS) of $1.72, up nearly 198% year-over-year, and revenue of approximately $4.11 billion, a 49.5% increase from the prior year. The key metrics to watch for include performance in its Flash and HDD businesses, where analysts expect revenue of $2.05 billion and $2.03 billion, respectively. Gross profit for the HDD segment is projected to rise significantly to $764.66 million from $273 million last year.

Investors will be keen to see if WDC continues its trend of beating Wall Street estimates, as the company has consistently exceeded expectations in recent quarters. One focus will be the company's guidance for Q2, especially after some concerns were raised following its Q4 report when guidance fell short of expectations. Additionally, investors will look for updates on WDC's ongoing separation of its Flash and HDD businesses, which is expected to complete by the end of 2024, as well as any potential dis-synergy costs.

On the positive side, WDC is benefiting from strong demand in AI-related memory and cloud markets, which fueled an 89% revenue growth in its cloud segment last quarter. Analysts are optimistic about continued momentum in these segments, especially as AI-driven data storage demand grows. Additionally, structural changes in the company, aimed at improving profitability, could provide further upside.

However, there are also concerns. The company's Q1 guidance will be closely scrutinized, particularly in light of its peers like Seagate (STX), which provided strong results and better-than-expected guidance. WDC's ability to manage costs and deliver on its separation plan will also be important factors. Investors may remain cautious given the potential dis-synergy costs and any short-term disruptions from the business split.

In terms of market sentiment, WDC has garnered a "Moderate Buy" consensus rating from analysts, with the average price target sitting at around $84.24..

Overall, while there is optimism about WDC’s growth potential, especially from AI and cloud demand, the Q1 earnings call will be critical in providing clarity on near-term challenges and whether WDC can maintain its upward trajectory amidst a complex business environment.

On September 12, Micron (MU) delivered an impressive Q4 report, driven by strong demand in AI servers, with data center revenues hitting record levels and 1Q25 revenue guidance far exceeding expectations. The company is benefiting from surging interest in high-bandwidth memory (HBM) chips, which are sold out through 2025, and projects its total addressable market for AI-related memory to grow significantly. This positive outlook bodes well for Western Digital (WDC), as similar trends in AI-driven memory demand and future PC growth could provide a boost to its performance as well.

Western Digital reported strong Q4 results with EPS significantly beating expectations and revenue growing 40.9% year-over-year to $3.76 billion, driven by strength in both its flash and HDD businesses. Flash growth was boosted by a recovery in the cloud segment and a shift toward gaming and mobile, though consumer demand remained weak. HDD performance was driven by nearline demand and improved pricing, with margins surpassing targets due to improved cost structure and manufacturing efficiencies. WDC also highlighted the long-term growth potential tied to AI, which is creating new demand for storage solutions across both segments.

However, despite the strong Q4 numbers, WDC's Q1 guidance disappointed investors, with the midpoints for both revenue ($4.00-4.20 billion) and EPS below analyst expectations. The company's pending separation of its flash and HDD businesses, set for completion by the end of 2024, also raised concerns as WDC expects to incur dis-synergy costs in the coming quarters, which may have impacted its guidance. The stock's decline was further compounded by comparisons to Seagate (STX), which delivered more favorable guidance in its recent report, leaving investors concerned about WDC's near-term outlook.