Western Digital (NASDAQ:WDC) Posts Better-Than-Expected Sales In Q2 But Stock Drops

Jabin Bastian /
2023/01/31 4:11 pm EST

Leading data storage manufacturer Western Digital (NASDAQ: WDC) reported Q2 FY2023 results topping analyst expectations, with revenue down 35.7% year on year to $3.1 billion. However, guidance for the next quarter was less impressive, coming in at $2.7 billion at the midpoint, being 9.79% below analyst estimates. Western Digital made a GAAP loss of $446 million, down on its profit of $564 million, in the same quarter last year.

Is now the time to buy Western Digital? Access our full analysis of the earnings results here, it's free.

Western Digital (WDC) Q2 FY2023 Highlights:

  • Revenue: $3.1 billion vs analyst estimates of $2.97 billion (4.49% beat)
  • EPS (non-GAAP): -$0.42 vs analyst estimates of -$0.13 (-$0.29 miss)
  • Revenue guidance for Q3 2023 is $2.7 billion at the midpoint, below analyst estimates of $2.99 billion
  • Free cash flow was negative $240 million, compared to negative free cash flow of $215 million in previous quarter
  • Inventory Days Outstanding: 133, up from 128 previous quarter
  • Gross Margin (GAAP): 16.9%, down from 33.2% same quarter last year

“The Western Digital team delivered revenue at the high end of our guidance range, despite a challenging flash price environment and continued cloud inventory digestion,” 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's revenue growth over the last three years has been unimpressive, averaging 1.93% annually. Last year the quarterly revenue declined from $4.83 billion to $3.1 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 Total Revenue

Despite Western Digital revenues beating analyst estimates, this was still a slow quarter with a 35.7% revenue decline.

Western Digital's revenue growth has decelerated for the last three quarters and the company expects growth to turn negative next quarter guiding to a 38.3% year on year decline, while analysts are estimating a NTM revenue decline of 9.29%.

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 Inventory Days Outstanding

This quarter, Western Digital’s inventory days came in at 133, 34 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's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Western Digital’s balance sheet, but we note that with a market capitalization of $14 billion and more than $1.87 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We liked to see that Western Digital beat analysts’ revenue expectations pretty strongly this quarter. That feature of these results really stood out as a positive. On the other hand, it was less good to see that revenue has declined and the revenue guidance for the next quarter missed analysts' expectations. Overall, this quarter's results could have been better. The company is down 6.1% on the results and currently trades at $41.2 per share.

Western Digital 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.