WDC rallies on heels of cloud performance, gives up some gains

Western Digital Corporation (WDC) posted a mixed Q3 earnings report, delivering an EPS of $1.78, beating analyst expectations of $1.71, while revenue slightly missed the $4.12 billion estimate, coming in at $4.1 billion. This performance represented a significant improvement over last year’s figures when WDC reported a loss per share of $1.76 and revenue of $2.75 billion. The positive EPS surprise was largely attributed to strength in WDC’s cloud division, a core growth area for the company. WDC's stock reacted favorably, jumping 13% in premarket trading, signaling market optimism over its near-term outlook despite the slight revenue miss.

One of the standout metrics in WDC’s Q3 performance was its cloud division, which contributed $2.2 billion in sales, making up 54% of total revenue and reflecting a 153% year-over-year increase. This growth was driven by robust demand from data center customers, especially in the areas of nearline HDDs and enterprise SSDs, which serve cloud and AI-related applications. The company’s focus on the AI Data Cycle—a framework for data storage solutions in AI ecosystems—positions it well to benefit from increasing AI adoption, as noted by CEO David Goeckeler, who highlighted WDC’s strategic alignment with AI-related storage needs.

Despite strength in its cloud division, WDC faced challenges in its consumer segment, where revenue dropped 7% year-over-year to $678 million, reflecting the continued softness in the PC market. The lingering impact of the post-pandemic slump in PC demand has constrained growth in WDC’s consumer-facing products. However, management expressed optimism about a potential recovery in consumer and client end markets through 2025, suggesting that while these areas are currently underperforming, they may improve as the broader economic landscape stabilizes.

Looking ahead, WDC provided guidance for Q2 FY2025 with revenue expected to range between $4.2 billion and $4.4 billion and adjusted EPS between $1.75 and $2.05. These projections were slightly below consensus estimates of $4.35 billion in revenue and $1.95 in EPS, as WDC anticipates higher NAND costs weighing on gross margins, which are expected to land between 37% and 39%, compared to the market's 38.5% forecast. This cautious guidance reflects the challenges WDC faces in maintaining margins amidst elevated input costs in the memory market.

Analysts maintain a generally positive outlook on WDC, underscoring its relative valuation attractiveness and strategic moves, such as the planned spin-off of its flash and HDD segments, slated for January 2025. This spin-off is anticipated to unlock shareholder value by allowing each business unit to focus on distinct strategic goals and resource allocations. Analysts at Mizuho, maintaining an Outperform rating and a $90 price target, highlighted the spin-off as a potential catalyst for WDC, creating a clearer growth narrative for its flash and HDD divisions.

The economic backdrop presents a mixed environment for WDC, with cloud demand and AI-related storage needs providing growth opportunities, while consumer and NAND flash segments face headwinds. NAND pricing remains volatile, and there is industry-wide caution around oversupply. However, Evercore ISI analyst Amit Daryanani suggested that WDC’s in-line guidance for Q4 should help alleviate concerns about the sustainability of the NAND market, which is highly influenced by AI data storage demands and the cyclical nature of flash pricing.

In summary, Western Digital’s Q3 earnings report underscored its strong position in the cloud and AI data storage markets, while also highlighting the challenges it faces in consumer segments. The company's strategic initiatives, including the upcoming spin-off, aim to streamline its operations and focus on core growth areas. Although near-term guidance was slightly below estimates, the market’s reaction suggests confidence in WDC’s long-term outlook, particularly as it aligns with the growing demands of AI and cloud computing.