Western Digital Corporation (NASDAQ:WDC) Reports Weak Q4 , Stock Drops

Jabin Bastian /
2022/08/05 8:14 am EDT

Leading data storage manufacturer Western Digital (NASDAQ: WDC) fell short of analyst expectations in Q4 FY2022 quarter, with revenue down 7.96% year on year to $4.52 billion. Revenue guidance for the next quarter was $3.7 billion at the midpoint. Western Digital Corporation made a GAAP profit of $301 million, down on its profit of $622 million, in the same quarter last year.

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Western Digital Corporation (WDC) Q4 FY2022 Highlights:

  • Revenue: $4.52 billion vs analyst estimates of $4.57 billion (0.98% miss)
  • EPS (non-GAAP): $1.78 vs analyst estimates of $1.72 (3.2% beat)
  • Revenue guidance for Q1 2023 is $3.7 billion at the midpoint
  • Free cash flow was negative $97 million, down from positive free cash flow of $148 million in previous quarter
  • Inventory Days Outstanding: 107, up from 104 previous quarter
  • Gross Margin (GAAP): 31.9%, up from 29.9% same quarter last year

"I am proud of our team for driving strong fiscal year 2022 performance, during which revenue grew 11% and non-GAAP EPS increased 81%, demonstrating progress in unlocking the earnings potential of our business,” said David Goeckeler, Western Digital CEO.

Founded in 1970 by a Motorola employee, Western Digital (NASDAQ: WDC) is a leading producer of hard disk drives, SSDs and flash memory.

The rapid growth in data generation and the need to support increases in processing power for everything from consumer devices to data center servers are driving the demand for memory chips. From the content delivery networks and edge computing to the cloud, data storage is a key component underpinning the global technology architecture. On top of that, secular growth drivers like machine learning and the boom in media-rich digital content are further accelerating the need for storage. Like all semiconductor segments, memory makers are highly cyclical, driven by supply and demand imbalances and exposure to consumer product cycles.

Sales Growth

Western Digital Corporation's revenue growth over the last three years has been unimpressive, averaging 5.44% annually. Last year the quarterly revenue declined from $4.92 billion to $4.52 billion. Semiconductors are a cyclical industry and long-term investors should be prepared for periods of high growth, followed by periods of revenue contractions (which can sometimes offer opportune times to buy).

Western Digital Corporation Total Revenue

It was a difficult quarter for Western Digital Corporation, with revenue declining by 7.97%, and missing analyst estimates by 0.99%. Western Digital Corporation's growth turned to declines this quarter, signaling that the current downcycle is deepening.

Revenue growth went from positive to negative this quarter and is expected to stay negative next quarter with an estimated decline of 26.8% YoY, while analysts expect revenues to turn positive over the next twelve months with growth of 4.19% over the next twelve months.

In volatile times like these we look for robust businesses with strong pricing power. Unknown to most investors, this company is one of the highest-quality software companies in the world, and their software products have been the default standard in critical industries for decades. The result is an impressive business that is up an incredible 18,152% since the IPO. You can find it on our platform for free.

Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise the company may have to downsize production.

Western Digital Corporation Inventory Days Outstanding

This quarter, Western Digital Corporation’s inventory days came in at 107, 15 days above the five year average, suggesting that that inventory has grown to higher levels than what we used to see in the past.

Key Takeaways from Western Digital Corporation's Q4 Results

With a market capitalization of $15.6 billion, more than $2.32 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We enjoyed seeing Western Digital Corporation improve their gross margin materially this quarter. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was less good to see that the revenue growth was quite weak. Overall, it seems to us that this was a complicated quarter for Western Digital Corporation. The company is down 7.77% on the results and currently trades at $46.03 per share.

Western Digital Corporation may have had a tough quarter, but does that actually create an opportunity to invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.

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The author has no position in any of the stocks mentioned.