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Weekly BullsEye | AI Chip Companies Are Booming, But Pay Attention to This Particular Stock!
AInvestWednesday, Jan 24, 2024 1:00 am ET
2min read

As the boom in artificial intelligence chips continues, the US stock chip index has set new closing highs since the start of this year. This surge has not only ignited industry giants such as Nvidia and AMD but also allowed smaller companies like Western Digital to ride the wave with soaring stock prices.

Since January 2nd of this year, Western Digital's stock price has risen nearly 14%. However, some analysts believe that the potential upside of this stock could reach 28%, and there exists an extremely compelling valuation gap compared to other companies in the same industry.

The company's spin-off will bring 'significant value'

Since 2022, Western Digital's performance has been severely damaged due to a sharp drop in market demand and an oversupply of storage chips. Last year, Japan Kioxia planned to merge with Western Digital's storage business, but the plan failed as SK Hynix came out against it.

Subsequently, Western Digital announced the spin-off into two companies, separately producing hard disk drives and flash memory. The split is expected to be completed this year, and its NAND Flash department will go public independently after the split.

Western Digital states that separating these two businesses will release enormous value for its shareholders, enabling them to share the advantages of two industry leaders with unique growth and investment situations.

A rebounding market will bring improvements

As for flash memory, the prices have risen more than 20% from a quarter ago. With Western Digital flash chips accounting for 15% of the global share, its sensitivity to end demand will give the company a good competitive advantage this year.

Notably, Western Digital's gross margin was positive for the quarter of last December, and some analysts believe its margin should already be in the mid-cycle level for the quarter of March this year, which would be well above its peers.

Also, the hard disk drive business is gradually recovering from the sluggish market conditions of 2023. The rapid development of artificial intelligence generates an enormous amount of data, which means the storage, management, and value extraction of data will become a strategic factor that companies must consider. This demand will also drive the rebound in Western Digital's hard disk business.

Under these cases, Morgan Stanley analyst Joseph Moore predicts that Western Digital's revenue for the next quarter will reach $3.49 billion, and earnings per share could hit 24 cents. He projects Western Digital's EPS to reach $4.18 for the full year 2024.

Strong Momentum

Technical analysis paints a bright future for Western Digital: over the past week, the company's stock price increased by 9.53%, while the industry went up by only 1.32% over the same period. 

Comparing long-term price signals, like performance over the last three months or year, its stock price also had a positive impact: Western Digital's stock price has increased by 34.38% over the past quarter, and 40.46% over the past year. In comparison, the S&P 500 only increased by 14.19% and 21.1%, respectively. These data underscore the strong bullish momentum in Western Digital.

The best 'risk-reward opportunity'?

Moore has designated the hard disk drive and memory chip company's stock as his top pick, replacing his overweight rating previously on Nvidia, and his price target for Western Digital's stock is $73, still about 26% higher than its closing price of $57.73 yesterday.

Moore believes that for Western Digital's stock, The parts-and-whole calculation is straightforward and compelling, and splitting the company in two also greatly simplifies the situation. He estimates Western Digital's hard disk drive business to be valued similarly to competitor Seagate Technology, while the NAND business will generate much higher returns than its peers.

All of these highlight the strategic value this company could have, and it will also provide the best risk-reward opportunity, the analyst writes.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.