3 Reasons to Avoid WDC and 1 Stock to Buy Instead

Western Digital’s stock price has taken a beating over the past six months, shedding 26.7% of its value and falling to $50.88 per share. This might have investors contemplating their next move.

Is there a buying opportunity in Western Digital, or does it present a risk to 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?

Despite the more favorable entry price, we don't have much confidence in Western Digital. Here are three reasons why you should be careful with WDC and a stock we'd rather own.

1. Revenue Spiraling Downwards

A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Western Digital struggled to consistently generate demand over the last five years as its sales dropped at a 7.9% 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

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

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 14.5% gross margin over the last two years. Said differently, Western Digital had to pay a chunky $85.50 to its suppliers for every $100 in revenue.

3. Weak Operating Margin Could Cause Trouble

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Western Digital was profitable over the last two years but held back by its large cost base. Its average operating margin of 4.3% was among the worst in the semiconductor sector. This result isn’t too surprising given its low gross margin as a starting point.

Final Judgment

Western Digital falls short of our quality standards. Following the recent decline, the stock trades at 10.4× forward P/E (or $50.88 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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