Company Overview: Western Digital Corporation (NASDAQ: WDC) is a global data storage devices and solutions provider. It has a broad portfolio of technology and products addressing three key end markets: Client Devices, Data Center Devices & Solutions, and Client Solutions. WDC also generates license and royalty revenue from intellectual property, and its data-centric solutions comprise Western Digital, G-Technology, SanDisk, and WD brands.

WDC Details

Key Takeaways from FY21 (ended July 02, 2021)

• Slight Growth in Total Revenue: In FY21, the company's total net revenues were USD 16.92 billion, representing a marginal 1.11% increase YoY from USD 16.74 billion in FY20 (ended July 03, 2020). Due to its extensive portfolio and market routes, WDC managed to drive growth in revenue despite the reopening of economies worldwide.
• Reducing Operating Expenses: WDC's operating expenses for the year were USD 3.30 billion, lower than USD 3.45 billion for FY20. Operating income for the period amounted to USD 1.22 billion.
• Improvement in Net Income: Net income for FY21 was USD 821 million vs. a net loss of USD 260 million in FY20, representing diluted earnings per share (EPS) of USD 2.66.

Recent Key Developments:

• On June 22, 2021, WDC launched its second-generation high-performance UFS 3.1 storage solution for 5G smartphones.
• On June 15, 2021, it announced the availability of its new high-performance Ultrastar Edge server family, which enables faster processing, lower latency, and real-time decision making, even when disconnected.
• On May 26, 2021, WDC released three new SSDs under the WD_BLACK portfolio catering to gamers worldwide, offering fast, high-performance storage solutions for PC upgrades and the next-gen console gaming experience.
• On May 26, 2021, the company also unveiled the brand-new SanDisk Professional for premium storage solutions aimed at content creators and professionals. This portfolio delivers scalable, high-performance, reliable solutions for professional creative content.
• WDC also partnered with Percona, a leading open-source database software company, on May 26, 2021, to efficiently manage growing online services and improve the database performance of its Ultrastar DC ZN540 NVMe ZNS SSDs for Percona's MySQL server.

Segment-Wise Revenue Generation: The company markets and delivers solutions to diverse markets. Its revenue-generating segments (segregated by end-market) include Client Devices, Data Center Devices & Solutions, and Client Solutions.

• Client Devices: FY21 revenue amounted to USD 8.26 billion, up 15.29% year-over-year, with higher demand for notebook and desktop HDDs, flash-based solutions, and gaming, smart video, automotive, and industrial applications.
• Data Center Devices & Solutions: While the revenue from this segment (USD 4.95 billion) in FY21 was down 20.52% year-over-year, on a quarterly basis, Q4FY21 revenue was USD 1.78 billion, up 43.65% from the previous quarter.
• Client Solutions: FY21 Revenue was USD 3.72 billion, up 11.02% year-over-year, owing to greater seasonal demand for HDD and flash-based solutions.

Revenue & Growth Profile; Analysis by Kalkine Group

Balance Sheet & Liquidity Position

• Robust Cash Balance: The company exited FY21 with a cash balance of USD 3.37 billion, 10.56% more than USD 3.05 billion at the end of FY20.
• Cashflow from Operations: Operating cash inflow in FY21 was USD 1.90 billion vs. USD 824 billion in FY20.
• Reducing Debt: WDC's total outstanding debt amounted to USD 8.73 billion at FY21 end, less than the total debt of USD 9.58 billion as of FY20.

Key Metrics: In FY21, WDC's EBITDA and operating margins were 13.8% and 7.2%, higher than the industry median of 12.1% and 6.8%, respectively. ROE was 8.1%, whereas the industry median stood at 3.2% for FY21. Debt/Equity was 0.81x as of July 02, 2021, vs. 1.00x as of July 03, 2020.

Profitability & Leverage Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together comprise around 36.16% of the total shareholding, while the top 4 constitute the maximum holding. The Vanguard Group, Inc. and BlackRock Institutional Trust Co. NA hold the maximum stake in the company at 10.78% and 5.16%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group

Risk Analysis

• Dependence on Ventures with Kioxia: The company has partnered with Kioxia for developing and manufacturing its flash-based technology, which poses risks and uncertainties that could negatively impact its business and financial condition.
• Supplier Concentration: WDC relies on a small number of suppliers for certain essential materials and components. And disruption in the supply chain, such as shortage or delay in supply, quality issues, supplier consolidation, etc., can adversely WDC's operating results.
• Customer Concentration: In FY20, 42% of WDC's revenue was generated from the top 10 customers. Such a concentration of revenue could hurt the company's financials in the long term.
• Technology Risk: The company faces the threat of cyber-attacks of varying degrees on its technology infrastructure and systems. The cyber-attack attempts are becoming increasingly common, with attackers developing more sophisticated systems, posing a significant risk to WDC's business.

Outlook

• In Q1FY22 (ending October 01, 2021), WDC expects its GAAP revenue to range between USD 4.90 billion to USD 5.10 billion, with gross margin ranging between 32.0% to 34.0%.
• Its operating expenses are estimated to be in the range of USD 865 million to USD 895 million.
• The estimated non-GAAP EPS range for the coming quarter is USD 2.25 to USD 2.55, based on ~317 million shares outstanding (diluted).

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, WDC's stock corrected ~19.07%. The stock is currently leaning towards the higher band of its 52-week range of USD 33.53 to USD 78.19. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and arrived at a target price with an upside of high teens (in percentage terms). We believe that the company can trade at a discount compared to its peer's average, considering the risks involved with the dependence on its relationship with Kioxia, customer and supplier concentration, stiff competition, and technology risk. We have taken peers such as Seagate Technology Holdings (NASDAQ: STX.OQ) and HP Inc. (NYSE: HPQ). Considering the decent fundamentals, various product launches, strategic growth initiatives, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 61.85, down ~2.06% as of August 16, 2021.

WDC Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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