Western Digital (NASDAQ:WDC) Reports Strong Q1 But Inventory Levels Increase

Adam Hejl /
2024/04/25 4:41 pm EDT

Leading data storage manufacturer Western Digital (NASDAQ: WDC) beat analysts' expectations in Q1 CY2024, with revenue up 23.3% year on year to $3.46 billion. The company expects next quarter's revenue to be around $3.7 billion, in line with analysts' estimates. It made a non-GAAP profit of $0.63 per share, improving from its loss of $1.34 per share in the same quarter last year.

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Western Digital (WDC) Q1 CY2024 Highlights:

  • Revenue: $3.46 billion vs analyst estimates of $3.35 billion (3.2% beat)
  • EPS (non-GAAP): $0.63 vs analyst estimates of $0.15 (312% beat)
  • Revenue Guidance for Q2 CY2024 is $3.7 billion at the midpoint, roughly in line with what analysts were expecting
  • Gross Margin (GAAP): 29%, up from 10.2% in the same quarter last year
  • Inventory Days Outstanding: 119, up from 114 in the previous quarter
  • Free Cash Flow of $91 million is up from -$242 million in the previous quarter
  • Market Capitalization: $22.71 billion

“As evidenced by our excellent third quarter results, Western Digital continues improving through-cycle profitability and dampening business cycles by leveraging our strategy of developing a diversified portfolio of industry-leading products across a broad range of end markets,” 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.

Memory Semiconductors

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 has been declining over the last three years, dropping by 6.7% on average per year. As you can see below, this was a weaker quarter for the company, with revenue growing from $2.80 billion in the same quarter last year to $3.46 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

Western Digital had a good quarter as its revenue grew 23.3% year on year, topping analysts' estimates by 3.2%. Western Digital's growth inflected from negative to positive this quarter, indicating that the recent cycle downturn is likely in the rearview mirror.

Western Digital returned to positive revenue growth this quarter and its management team expects the trend to continue. The company is guiding to 38.5% year-on-year growth next quarter, and analysts seem to agree, forecasting 38.9% growth over the next 12 months.

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Product Demand & Outstanding Inventory

Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity 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 DIO came in at 119, which is 11 days above its five-year average, suggesting that the company's inventory has grown to higher levels than we've seen in the past.

Key Takeaways from Western Digital's Q1 Results

We were impressed by Western Digital's strong gross margin improvement this quarter. We were also excited its revenue and EPS outperformed Wall Street's estimates, driven by better-than-expected performance in its cloud and client end markets. On the other hand, its inventory levels increased, but that could be a result of stockpiling resources ahead of demand - management noted industry supply and demand dynamics are improving. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The market was likely expecting more, however, and the stock is down 1.1% after reporting, trading at $68.7 per share.

So should you invest in Western Digital right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.