Western Digital (WDC)

Leading data storage manufacturer Western Digital (NASDAQ: WDC) beat Wall Street’s revenue expectations in Q3 CY2025, with sales up 27.4% year on year to $2.82 billion. Its non-GAAP profit of $1.78 per share was 12.9% above analysts’ consensus estimates.

Company Overview

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

Western Digital’s peers and competitors include Seagate (NASDAQ:STX), SK Hynix (KOSI:000660), and Samsung (KOSI:005930).

The global memory chip market has become concentrated due to the highly commoditized nature of these semiconductors. Despite the market consolidation, DRAM and NAND are subject to wide pricing swings as supply and demand ebbs and flows. This plays itself out in the business models of memory producers, where the large, fixed cost bases required to produce memory chips in volume can become very profitable during times of rising prices due to high demand and tight supply but also can result in periods of low profitability when more supply is brought online or demand drops. Read More. There are two main types of memory chips: dynamic random access memory (DRAM) and Flash memory (NAND). In any electronic device where a processor or a graphics chip is conducting a task using data, it needs to read the data from where it is stored, known as memory. Smartphones, PCs, and data centers account for more than two thirds of memory demand. DRAM is “volatile” memory, it is a semiconductor that requires an electric charge to retain data – it is the type of memory commonly used in PCs. The advantages of DRAM are the speed at which a CPU/GPU can access the data and its long useful life. Unfortunately, “volatile” means it only can hold data temporarily when it is powered. By comparison, flash memory or NAND is “non-volatile” memory, which means that it saves data when power is removed, making it commonly used in almost every mobile device, along with USB flash drives. Its smaller form factor and greater storage capacity has made NAND-powered solid state drives (SSDs) the long term replacement for the original computing storage device, the hard disk drive.

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Western Digital’s demand was weak over the last five years as its sales fell at a 9.4% annual rate. This was below our standards and is a sign of lacking business quality. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.

We at StockStory place the most emphasis on long-term growth, but within semiconductors, a half-decade historical view may miss new demand cycles or industry trends like AI. Western Digital’s annualized revenue growth of 1.8% over the last two years is above its five-year trend, but we were still disappointed by the results.

This quarter, Western Digital reported robust year-on-year revenue growth of 27.4%, and its $2.82 billion of revenue topped Wall Street estimates by 2.8%. Beyond the beat, this marks 5 straight quarters of growth, implying that Western Digital is in the middle of its cycle - a typical upcycle generally lasts 8-10 quarters.

Looking ahead, sell-side analysts expect revenue to grow 14.9% over the next 12 months, an improvement versus the last two years. This projection is particularly noteworthy for a company of its scale and indicates its newer products and services will spur better top-line performance.

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.

This quarter, Western Digital’s DIO came in at 80, which is 34 days below its five-year average. These numbers show that despite the recent increase, there’s no indication of an excessive inventory buildup.

In the semiconductor industry, a company’s gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

Western Digital’s gross margin is one of the worst in the semiconductor industry, signaling it operates in a competitive market and lacks pricing power. As you can see below, it averaged a 8.4% gross margin over the last two years. That means Western Digital paid its suppliers a lot of money ($91.57 for every $100 in revenue) to run its business.

In Q3, Western Digital produced a 43.5% gross profit margin, marking a 58.1 percentage point increase from -14.6% in the same quarter last year. Western Digital’s full-year margin has also been trending up over the past 12 months, increasing by 47.1 percentage points. If this move continues, it could suggest a less competitive environment where the company has better pricing power and leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Western Digital has done a decent job managing its cost base over the last two years. The company has produced an average operating margin of 17.3%, higher than the broader semiconductor sector.

Looking at the trend in its profitability, Western Digital’s operating margin rose by 16.9 percentage points over the last five years, showing its efficiency has meaningfully improved.

In Q3, Western Digital generated an operating margin profit margin of 28.1%, up 13.1 percentage points year on year. The increase was driven by stronger leverage on its cost of sales (not higher efficiency with its operating expenses), as indicated by its larger rise in gross margin.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Western Digital’s EPS grew at a decent 14.4% compounded annual growth rate over the last five years, higher than its 9.4% annualized revenue declines. This tells us management adapted its cost structure in response to a challenging demand environment.

We can take a deeper look into Western Digital’s earnings to better understand the drivers of its performance. As we mentioned earlier, Western Digital’s operating margin expanded by 16.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q3, Western Digital reported adjusted EPS of $1.78, in line with the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Western Digital’s full-year EPS of $6.57 to grow 7.4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Western Digital has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 10.6%, subpar for a semiconductor business.

Taking a step back, an encouraging sign is that Western Digital’s margin expanded by 12.9 percentage points over the last five years. We have no doubt shareholders would like to continue seeing its cash conversion rise as it gives the company more optionality.

Western Digital’s free cash flow clocked in at $599 million in Q3, equivalent to a 21.3% margin. Its cash flow turned positive after being negative in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Western Digital historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.4%, somewhat low compared to the best semiconductor companies that consistently pump out 35%+.

Western Digital reported $3.01 billion of cash and $4.68 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $3.12 billion of EBITDA over the last 12 months, we view Western Digital’s 0.5× net-debt-to-EBITDA ratio as safe. We also see its $326 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Western Digital beat analysts’ revenue, operating profit, and EPS expectations this quarter. Zooming out, we think this was a good print. The stock traded up 12.3% to $155.18 immediately after reporting.

Updated: December 4, 2025 at 9:16 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Western Digital.

Western Digital isn’t a terrible business, but it isn’t one of our picks. For starters, its revenue has declined over the last five years. And while its rising cash profitability gives it more optionality, the downside is its low gross margins indicate some combination of pricing pressures or rising production costs. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Western Digital’s P/E ratio based on the next 12 months is 19.3x. This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $181.43 on the company (compared to the current share price of $161.42).