Western Digital's Nasdaq-100 Entry Caps Its AI-Driven Comeback

Western Digital Corporation (NASDAQ: WDC) has emerged as one of the standout technology stories of 2025. The company’s stock has appreciated by approximately 195% year-to-date, recently trading around $175 per share. This impressive performance is set to receive another significant boost as the company officially joins the Nasdaq-100 Index prior to the market open on Monday, December 22, 2025.

This inclusion is more than just a badge of honor or a vanity metric. It validates the company's strategic decision to separate its Flash memory business in February 2025. That move transformed Western Digital into a focused provider of hard disk drive (HDD) infrastructure.

By replacing apparel retailer Lululemon (NASDAQ: LULU) in the index, Western Digital signifies a broader market rotation: investors are moving away from consumer discretionary goods and back toward essential technology hardware. For investors, this event represents a double catalyst: a technical boost from index purchasing and a fundamental transformation into a critical player in the artificial intelligence (AI) economy.

The Power of Passive Buying

When a stock is added to a major benchmark like the Nasdaq-100, it triggers a financial phenomenon known as the Index Effect. This index is tracked by passive investment funds, most notably exchange-traded funds (ETFs), such as the Invesco QQQ (NASDAQ: QQQ). These funds are contractually obligated to own the stocks listed in the index to ensure their performance matches the benchmark perfectly. As a result, they must purchase millions of shares of Western Digital to align their portfolios with the new index composition.

This creates a wave of forced buying demand that is entirely independent of the company's day-to-day operational news. This influx of institutional capital often establishes a technical floor for the stock price in the short term, as funds must accumulate shares regardless of the current price. This mechanical purchasing pressure can drive stock prices higher simply because there is a new, guaranteed buyer in the market.

A Double-Barreled Demand Dynamic

While external funds are forced to buy shares, Western Digital is actively reducing its own stock supply. In the first fiscal quarter of 2026, the company repurchased $553 million of its own shares.

This combination creates a powerful imbalance between supply and demand. On the one hand, ETFs buy shares to track the index. On the other side, the company is aggressively buying back its own stock, permanently removing those shares from the open market. When demand spikes while supply shrinks, the natural economic result is upward pressure on Western Digital’s stock price. This double-barreled dynamic provides a strong tailwind for the stock as it enters 2026.

Storage for the Intelligence Era

Western Digital qualified for the Nasdaq-100 because its market capitalization, now approximately $60 billion, surged following the successful separation of its Flash business. The company is now a pure-play HDD manufacturer, a move that has allowed it to focus entirely on the booming demand for mass data storage.

This valuation growth is directly connected to the AI Super Cycle. Artificial Intelligence models require massive datasets for training and long-term archiving. This data must be stored on high-capacity, cost-effective drives known as Nearline storage. As a result, Western Digital is no longer viewed just as a legacy storage maker, but as a critical infrastructure provider for the AI revolution.

• Cloud Growth: In the most recent quarter, revenue from cloud customers grew 31% year-over-year to $2.51 billion. This segment now accounts for 89% of the company’s total revenue.
• Data Explosion: The company shipped a total of 204 exabytes of storage in the first quarter of fiscal year 2026, a 23% increase compared to the previous year.

Expanding Margins and Earnings

This surge in demand has translated directly to the bottom line. With high demand and limited industry supply, Western Digital has significantly improved its profitability.

• Gross Margin: Non-GAAP gross margin expanded to 43.9% in the recent quarter, a substantial improvement from 37.3% a year prior.
• Earnings Beat: The company reported non-GAAP earnings per share (EPS) of $1.78, beating analyst expectations.

These metrics confirm that the company is selling more products at better prices, a clear sign of a healthy business model.

Seagate and Western Digital: The Storage Duopoly

It is crucial to note that Western Digital is not alone in this upward trajectory. Its primary competitor, Seagate Technology (NASDAQ: STX), is also joining the Nasdaq-100 in the same reconstitution. The fact that both major HDD manufacturers are being added to the index simultaneously serves as a massive validation for the entire data storage sector.

This confirms that the rally is not a fluke specific to one company. Instead, it signals a sector-wide revaluation of data storage assets. The market has realized that in an AI world, storage is a scarce and valuable commodity. With both major players focusing on profitability over market share, the pricing environment remains rational and favorable for industry margins.

Pricing Power and 2026 Valuation

Looking ahead, the company’s financial outlook appears healthy. Management has secured firm purchase orders from its top hyperscale customers that extend through the entire 2026 calendar year. This unusual level of visibility mitigates the risk of sudden revenue drops and allows the company to plan its production efficiently.

Furthermore, management has guided that the HDD market is expected to remain supply-constrained through 2026. In the hardware industry, scarcity equals pricing power. With demand from AI data centers outstripping the industry's ability to produce high-capacity drives, Western Digital is well-positioned to maintain or even increase its profit margins.

Despite the stock's 195% rally this year, Western Digital’s analyst community sees further upside potential. Recent price targets from firms like Loop Capital have reached as high as $250, while Citigroup has set a target of $200. Additionally, China Renaissance recently initiated coverage with a Buy rating and a $193 target. These targets suggest that the market may not have fully priced in the duration and magnitude of the AI storage cycle.

Additionally, the company is committed to returning cash to shareholders. The Board of Directors recently raised the quarterly dividend by 25% to $0.125 per share. This increase serves as a signal of management’s confidence in its ability to generate sustained cash flow.

Spinning Gold: The Hard Drive Renaissance

The inclusion of Western Digital in the Nasdaq-100 Index provides a significant short-term trading catalyst through the Index Effect. However, the long-term investment case is built on a solid fundamental foundation. By transforming into a focused provider of high-capacity storage for the AI economy, the company has secured a critical role in the data center of the future. With a shareholder-friendly capital allocation strategy, secured long-term orders, and favorable market dynamics, Western Digital is positioned as a top-tier technology holding for 2026.

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The article "Western Digital’s Nasdaq-100 Entry Caps Its AI-Driven Comeback" first appeared on MarketBeat.