Western Digital Corporation (WDC) stock saw a sizable boost this week after multiple analyst upgrades and being named a top pick in the semiconductor industry. The storage device manufacturer’s shares climbed over 8% to a new 52-week high on the news, marking a potential turnaround for the formerly struggling stock.
Backdrop of Struggles and Transformation
Western Digital has faced headwinds in recent years as declining NAND flash memory prices and waning PC sales impacted earnings. The company embarked on a transformation strategy in 2021 to shift its business towards high-growth data center and cloud storage markets.
Initiatives like developing energy assisted drives and ramping up production of next-generation drives aim to make Western Digital a leader in high-capacity storage. However, the costly transition led profits and margins lower in 2022. The stock dropped nearly 50% last year as a result.
Tailwinds Emerging in 2023
Signs are emerging in 2023 that Western Digital may be turning a corner in its transformation. The company guided better-than-expected fiscal Q2 earnings, indicating strategic tailwinds are materializing.
Additionally, both NAND and disk drive markets are stabilizing. This led Deutsche Bank analyst Sidney Ho to upgrade WDC stock to Buy from Hold. Ho believes the worst is likely over and Western Digital can capitalize on growth opportunities going forward.
Morgan Stanley Names WDC Top Semiconductor Pick
The biggest catalyst came last Friday when Morgan Stanley crowned Western Digital its top semiconductor pick for 2023, replacing previous pick Nvidia. Analyst Joe Moore explained the rotation:
“After a brutal year for semis in 2022, we are increasingly focused on stocks with the best cost opportunities and potential for positive estimate revisions, rather than our previous preference for secular growers.”
Moore sees Western Digital positioned to benefit from improving NAND industry conditions and stabilizing HDD revenue. The company’s cost saving efforts also have it on track to generate over $1 billion in free cash flow in calendar 2023.
Surge to 52-Week High
The Morgan Stanley upgrade and top pick designation prompted a flood of Western Digital buying. The stock jumped 9% last Friday and extended gains on Monday to over 17% in just three trading days.
Shares cleared the $40 level to tag a new 52-week peak of $42.18 before pulling back slightly. The powerful rally brings Western Digital stock back to levels not seen since April 2022.
|Morgan Stanley top pick call
|Deutsche Bank upgrade
|Hits 52-week high
Traders cheered the bullish reassessment of Western Digital’s prospects. After badly lagging the market in 2022, the stock has charged 12% higher year-to-date.
Positive Revisions Ahead?
The recent endorsements suggest Western Digital may be poised for estimate revisions higher after years of declines. 10 analysts boosted their WDC stock price targets last week, pointing to improving industry conditions.
KeyBanc Capital Markets analyst John Vinh noted:
“We expect investors to become more positive on WDC heading into the print given signs of HDD stability and continued recovery in NAND.”
Vinh raised his target from $32 to $38. Other firms like Bank of America and Goldman Sachs also upped targets to the $38 to $39 zone. That suggests nearly 10% additional upside from current levels.
If Western Digital delivers on its guidance and continues making progress on its strategic transformation, 2023 earnings estimates could trend higher. That would provide further tailwinds for the stock to continue its recovery.
What the Bulls Say
- Morgan Stanley sets $63 price target – 50% upside
- Industry consolidation supportive for HDD pricing
- Cost saving efforts driving margin improvement
- Bottoming NAND market stabilize revenues
- Valuation discount to peers unwarranted
What the Bears Say
- Declining PC unit sales a headwind
- HDD to be sunset technology over time
- Transition execution risk remains
- Macro weakness could impact storage demand
Outlook Going Forward
After announcing multiple Positive developments over the past week, Western Digital appears to have turned an important corner. With more analysts growing bullish on WDC stock, the recent breakout has room to run higher.
However, the company still faces risks from weak PC demand and needs to demonstrate consistent execution. Prices are approaching analysts’ average price target around $44.
Q2 earnings on January 31st will be a critical test. Investors may wait to see results before extending the rally. Nonetheless, Western Digital is firmly back on the radar as a turnaround stock to watch.
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