3 Reasons to Avoid WDC and 1 Stock to Buy Instead

Western Digital has been on fire lately. In the past six months alone, the company’s stock price has rocketed 93.3%, setting a new 52-week high of $86.27 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Western Digital, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think Western Digital Will Underperform?

We’re happy investors have made money, but we don't have much confidence in Western Digital. Here are three reasons there are better opportunities than WDC and a stock we'd rather own.

1. Revenue Spiraling Downwards

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Western Digital struggled to consistently generate demand over the last five years as its sales dropped at a 10.7% annual rate. This wasn’t a great result and signals it’s a low quality business. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

2. Low Gross Margin Reveals Weak Structural Profitability

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Western Digital’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a negative 7.7% gross margin over the last two years. That means Western Digital lost $7.65 for every $100 in revenue.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Western Digital historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 4.7%, lower than the typical cost of capital (how much it costs to raise money) for semiconductor companies.

Final Judgment

Western Digital falls short of our quality standards. Following the recent rally, the stock trades at 15.3× forward P/E (or $86.27 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.

Stocks We Would Buy Instead of Western Digital

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