Western Digital Corp (WDC, Financial) experienced a daily gain of 1.73%, and over the past three months, it has seen a gain of 16.62%. However, it has recorded a Loss Per Share of 5.41. This raises the question: is Western Digital's stock significantly overvalued? This article aims to provide a comprehensive valuation analysis of Western Digital, offering insights into its financial health and growth prospects. Read on to learn more.
Company Introduction
Western Digital is a leading vertically integrated supplier of data storage solutions, spanning both hard disk drives and solid-state drives. It forms a practical duopoly with Seagate in the HDD market and is the largest global producer of NAND flash chips for SSDs in a joint venture with competitor Kioxia. Despite a current stock price of $45.33, our GF Value estimates the fair value at $33.98, indicating that the stock might be significantly overvalued.
Understanding the GF Value
The GF Value is a unique measure of a stock's intrinsic value, derived from historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair trading value of the stock. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Given Western Digital's current price of $45.33 per share, the stock seems to be significantly overvalued according to our GF Value estimation. As a result, the long-term return of its stock is likely to be much lower than its future business growth.
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Assessing Western Digital's Financial Strength
Before investing in a company, it's crucial to evaluate its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. The cash-to-debt ratio and interest coverage can provide insights into a company's financial health. Western Digital has a cash-to-debt ratio of 0.29, ranking worse than 83.22% of 2372 companies in the Hardware industry. Its overall financial strength is 5 out of 10, indicating fair financial health.
Profitability and Growth
Companies that have consistently been profitable over the long term offer less risk to investors. Western Digital has been profitable 7 over the past 10 years. However, its operating margin is -8.87%, ranking worse than 80.58% of 2456 companies in the Hardware industry. Overall, Western Digital's profitability is ranked 6 out of 10, indicating fair profitability.
Growth is one of the most critical factors in a company's valuation. Western Digital's 3-year average revenue growth rate ranks worse than 84.56% of 2332 companies in the Hardware industry. Its 3-year average EBITDA growth rate is 0%, ranking worse than 0% of 1961 companies in the Hardware industry. This indicates that Western Digital's growth is relatively weak compared to its peers.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) and the weighted cost of capital (WACC) can provide insights into its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, ROIC should be higher than WACC. However, for the past 12 months, Western Digital's ROIC is -6.27, and its WACC is 10.48, indicating potential profitability issues.
Conclusion
In summary, Western Digital (WDC, Financial)'s stock appears to be significantly overvalued. While the company's financial condition and profitability are fair, its growth ranks worse than 0% of 1961 companies in the Hardware industry. To learn more about Western Digital's stock, you can check out its 30-Year Financials here.
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