Western Digital Corporation WDC has become a key beneficiary of the AI infrastructure boom. Its shares have climbed 70.4% in the past six months compared with the 102.8% growth of the Zacks Computer-Storage Devices industry. The stock has outperformed the Zacks Computer & Technology sector and the S&P 500’s growth of 20.6% and 13.1%, respectively. WDC’s gain reflects a powerful combination of rising data-center storage demand, improving HDD pricing, expanding margins and stronger-than-expected earnings.
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The company operates in a competitive AI-driven storage landscape, dominated by HDD bigshots like Seagate Technology Holdings plc STX, as well as other storage players like Micron Technology MU and its own spinoff entity SanDisk Corporation SNDK. STX, MU, and SNDK all topped WDC’s rally with 117.4%, 141.3%, and 174.9% gains over the same period.
WDC has appreciated sharply, expectations are elevated and the stock remains highly volatile. As of Sept. 3, WDC closed at $441.57, after reaching a 52-week high of $799.87 in June. So, after such a large rally, should investors buy, sell or hold WDC stock?
AI & Cloud Storage are WDC’s Core Growth Engine
The main reason to remain optimistic about WDC is that its financial performance has caught up with the stock rally, driven by momentum in its cloud business. Western Digital generated $3.75 billion of revenue in the fiscal fourth quarter, up 44% year over year. Non-GAAP gross margin expanded to 54.4%, while non-GAAP operating margin reached 44.2%. Adjusted EPS climbed 109% year over year to $3.56. Cloud represented approximately 89% of quarterly revenue, with sales increasing 43% year over year to $3.3 billion. Demand was particularly strong for higher-capacity nearline HDDs used in data centers.
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Demand is being driven by AI workloads, cloud services and data-intensive applications such as autonomous vehicles and robotics. As data generation continues to surge, particularly from AI inference and agentic AI, growing storage requirements are favoring HDDs as a cost-effective solution for storing data at scale. WDC is also beginning to ship next-generation ePMR drives with capacities up to 40TB, providing another avenue for increasing storage density and improving economics for hyperscale customers. The company plans to ramp UltraSMR technology, which will comprise around 60% of nearline shipments by fiscal 2027.
Pricing Power Could Be WDC’s Bigger Catalyst
Investors should pay close attention to pricing rather than revenue alone. Price per terabyte increased in the high teens year over year, supported by long-term agreements extending into 2029-2031. Pricing remains predictable, with further opportunities for increases driven by higher-capacity drives and value-based total cost of ownership improvements. At the same time, cost per terabyte declined about 8% year over year in the fiscal fourth quarter, with the company targeting a long-term annual reduction of around 10%, supporting continued margin expansion.
WDC reported that higher-capacity drives, improved pricing and manufacturing discipline helped push gross margins sharply higher. Average price per terabyte also improved substantially. If demand remains strong while supply stays disciplined, incremental revenue can translate into disproportionately higher profits. The company's fiscal first-quarter guidance solidifies this view. Management expects revenue of approximately $4.1 billion, representing year-over-year growth of 42-49%, while non-GAAP gross margin is expected at 55-56% and EPS at approximately $4.
Furthermore, the company maintains a commitment to returning free cash flow via dividends and share repurchases. It returned $3.1 billion to shareholders during fiscal 2026. In the fourth quarter of fiscal 2026, it repurchased common shares for $1 billion and paid $54 million in dividends. Western Digital also completed the monetization of its remaining 1.7 million SanDisk shares by exchanging them for 4.8 million of its shares. At fiscal 2026 year-end, the company held about $1.6 billion in cash against $1.1 billion of debt, leaving a net cash position of roughly $500 million.
However, Western Digital relies heavily on a few large cloud customers, making revenue and exabyte shipments sensitive to customer mix, order timing and pricing. Technology transitions carry execution risk as growth depends on successful ramps of higher-capacity ePMR, HAMR and UltraSMR drives. Delays or weaker adoption could limit expected cost and capacity benefits.
Upbeat Estimate Revision Trend for WDC
Western Digital’s estimate revisions are on an upward trajectory currently. The Zacks Consensus Estimate for its earnings for fiscal 2027 has been revised up by 7.5% to $20.03 over the past 60 days, while the same for fiscal 2028 has gone up 7.6% to $34.74.
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Valuation Vulnerabilities
Going by the price/sales ratio, the company’s shares currently trade at 7.52 forward sales compared with 3.05 for the industry.
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In comparison, the forward 12-month price/sales multiple for STX, MU and SNDK are 8.98X, 8.27X and 4.47X, respectively.
Buy, Fold, or Hold WDC Stock?
WDC’s growth prospects remain compelling, driven by accelerating data creation, strong hyperscaler demand, higher-capacity drives, improving pricing and dramatically better margins, which provide a credible path to continued earnings growth. Nonetheless, shares have already priced in a substantial portion of the AI-storage opportunity. Excellent results may no longer be enough. WDC increasingly needs to deliver results that exceed already-exceptional expectations.
WDC may not be a bargain after its spectacular run, but it is too fundamentally strong to dismiss. Investors should therefore consider adding the stock to their portfolio now, while closely monitoring cloud revenue, HDD pricing, gross margins and hyperscaler spending. WDC carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Western Digital Corporation (WDC): Free Stock Analysis Report
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This article originally published on Zacks Investment Research (zacks.com).