Western Digital (WDC) has turned into a high-beta AI storage trade that is up almost 900% in the past year. The stock has shown no sign of slowing down as WD's products are in the intersection of the data center buildout. Investors are not looking at a meme-y chart story because the bull case is powered by both solid profits and revenue.
Thus, despite this surge, investors are paying just 60.9 times earnings for the stock. It looks high, but it's very much worth the growth for investors. EPS is growing at ~70% year-over-year (YOY) per quarter on average.
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Some analysts are not fully satisfied by the stock's rally, and they believe there's room for even more growth due to incessant data center spending by hyperscalers. The company makes data storage, and one can argue that it's even more important than GPUs.
Without data storage, AI companies can't train on data and store user conversations. Also, storage is needed for normal cloud capacity that almost all hyperscalers offer. Even if the AI boom dies down, companies will always need new storage.
www.barchart.com What Bank of America Expects
Bank of America has rated both Western Digital and Seagate Technology (STX) as a "Buy". BofA analysts noted that "...we continue to see demand exceeding supply and see continued scope for OEMs to raise prices." The analysts then raised their price target on WDC stock from $415 to $495. They expect "significantly higher earnings per share totals by 2028."
The analysts also pointed out that the data storage market is an oligopoly. Only three original equipment manufacturers provide most of the hardware, with new entrants struggling to establish a stake and keep pace.
Thus, as long as data center demand continues, so will the data storage rally. Management has already said that demand is no longer the issue, since the company is "pretty much sold out for calendar year 26."
Western Digital's Q3 Earnings Report
Analysts expect the Q3 earnings report to confirm that Western Digital is keeping up with the demand. The primary concern has shifted from demand to capacity and execution. If Western Digital can prove it can scale with the demand, the stock will comfortably run higher.
On the last earnings call, management said it had firm purchase orders with its top seven customers through calendar 2026 and longer-term agreements with three of its top five customers that extend into 2027 and 2028. Hence, it could outperform expectations.
Analysts are looking for revenue growth of 42% YOY plus margin expansion. Consensus is at $3.23 billion in revenue and $2.28 in EPS.
www.barchart.com A modest upward guidance is also expected for the trajectory to stay in line.
Before or After Earnings, WDC is a Buy
Western Digital is yet to report Q3 earnings as of this writing, but I expect a beat plus a guidance hike. Most data centers are still grappling with supply issues, and many companies are stockpiling storage. It would be very surprising if Western Digital posted a disappointing earnings report in this environment.
The past three quarters saw revenue beats to the tune of 3-5% every time, along with an EPS beat of ~12% on average. Extrapolating that trend puts revenue at ~$3.35 billion, with the EPS at $2.65.
Even if Western Digital disappoints on earnings day, I'd still buy. The culprit will be execution and the company's capacity to scale, not demand. We're likely looking at over a year of strong demand, so being shaken out early due to a bad earnings report is not a good idea.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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