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What’s Driving Western Digital’s Stock Price?

July 16, 2014 | About:

Western Digital (NASDAQ:WDC) has been witnessing good surge in its stock price. Shares of computer storage drive-maker touched a new 52-week high of $99.98 on July 15, 2014, marking a significant surge from the previous highs of $95.11 and $99.25 spotted on July 1 and July 14, respectively. At closing, the share price represents a solid one-year return of 45.40%.

The $23.2 billion company is about to release its fourth-quarter 2014 results on July 30 and investors have high expectations from the company’s performance. Even the optimism in analysts’ expectations affirms further upside potential of the stock. Let’s find out which factors are affecting investor sentiments.

Positive Sentiments Around PC Market

The PC market has shown signs of rebounding during the first quarter of 2014, but experts are cynical about the sustainability of the growth trend. Research firm Gartner expects global PC revenue to decline in 2014 and 2015, although the rate of decline would be moderate.

Despite such reservation, certain research analysts are positive about the PC market turnaround. Deutsche Bank analyst Sherri Scribner voiced:

extended lives of existing personal computers are the driving growing demand for PCs and thus boosting the companies' fortunes

The take away from such a statement would obviously mean a lot for the companies associated with the PC industry. Sherri thinks that storage device manufacturers such as Western Digital and Seagate Technology (NASDAQ:STX) could be the big beneficiaries of the turnaround. Similar view has been shared by the analysts of RBC Capital and Susquehanna Financial Group.

True that the dwindling PC market is a bottleneck for the HDD sector, but that is not the only market for it. According to Gartner, shipment of HDDs grew 1.6% year over year in the first quarter driven by strong demand from the gaming space.

In last quarter’s conference call, Western Digital mentioned that the higher-than-expected industry TAM (total available market) was mainly on account of higher demand from PC gaming space. The improving demand for new gaming consoles that require integrated hard drives is boosting HDD shipment. Given that gaming HDDs are sold at a lower price, the company mentioned in its call transcript that huge volume growth would make up for the most.

SSD Revenues Are Growing Continually

Western Digital is making good progress in the solid state drive (SSD) space. Last quarter, the company’s enterprise SSD revenue grew 45.7% year over year to $134 million, representing roughly 4% of total revenue. The improvement was driven by new product launches and the company expects to broaden its portfolio continuously.

Forbes sees strong business opportunities in enterprise SSD market, which crossed more than $2 billion in revenue in just six years time. The sectors that will help boost the enterprise SSD market would be data center. Growing appetite for exchanging Big Data and digital content requires high-performance storage drives, which is why data centers are demanding more powerful solid state drives for storing data. Western Digital’s latest acquisitions position it well to meet the growing need.

The company expects further boost in its enterprise SSD revenue from the synergies of three acquired companies. In 2013, it acquired SSD-makers STec, Virident and Velovit to make its presence felt in this high-margin segment. In the third-quarter call transcript, the company had mentioned about developing roadmaps to make these acquisitions accretive to earnings.

Increasing demand for SSDs coupled with Western Digital’s growing expertise in the segment can generate huge revenues in the coming quarters. Even the company thinks that the business could outpace the industry’s revenue growth in the long term. The company’s long term forecast looks achievable as Susquehanna’s analyst Mehdi Hosseini expects Western Digital’s SSD revenue to contribute roughly 7% (up from 4% level) of the total by 2016.

Summing Up

Western Digital has firm footing in the HDD segment and it seems that opportunities in the PC market (especially gaming) could give it further push. Moreover, its effort to build position in the SSD space is paying off, which could drive the company to a new height. So, these segments together help to paint a bright future for the storage giant, and this is something that’s getting priced in, resulting in the surge in the stock price.

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