Western Digital Corp (WDC, Financial) has recently shown a daily gain of 6.01% and a three-month gain of 17.84%, yet it reports a Loss Per Share of 7.66. With the stock's current valuation status as "Significantly Overvalued," investors are prompted to question whether this valuation is justified. This article delves into the valuation analysis of Western Digital, guiding readers through a detailed financial examination to determine the stock's true worth.
Company Introduction
Western Digital Corp (WDC, Financial) is a powerhouse in the data storage industry, holding a dominant position in both hard disk drives (HDD) and solid-state drives (SSD). As part of a practical duopoly with Seagate in the HDD market, and as the largest global producer of NAND flash chips in a joint venture with competitor Kioxia, Western Digital's business operations are extensive and influential. With a current market cap of $17 billion and sales reaching $11.30 billion, the company's financial footprint is significant. However, the stock's price of $52.38 stands in stark contrast to the GF Value of $33.54, indicating a potential overvaluation. This juxtaposition sets the stage for an in-depth analysis of Western Digital's intrinsic value.
Summarize GF Value
The GF Value is a comprehensive measure of a stock's intrinsic value, meticulously calculated using historical trading multiples, a GuruFocus adjustment factor, and future business performance estimates. The GF Value Line, a visual representation of this calculation, suggests the fair value at which the stock should ideally trade. When a stock's price significantly surpasses the GF Value Line, it may be overvalued, hinting at potentially lower future returns. Conversely, if the price is well below the GF Value Line, the stock could be undervalued, suggesting higher future returns. According to GuruFocus' valuation method, Western Digital (WDC, Financial) is significantly overvalued at its current price of $52.38 per share.
Link: These companies may deliver higher future returns at reduced risk.
Financial Strength
Assessing a company's financial strength is crucial to avoid the high risk of permanent capital loss. Key indicators such as the cash-to-debt ratio and interest coverage can provide insights into this aspect. Western Digital's cash-to-debt ratio of 0.27 ranks lower than 83.87% of its peers in the Hardware industry. With an overall financial strength rating of 5 out of 10, Western Digital's financial health is deemed fair.
Profitability and Growth
Investing in companies with a consistent track record of profitability, such as Western Digital, generally poses less risk. Western Digital has been profitable for 7 out of the past 10 years, with recent revenues of $11.30 billion and a Loss Per Share of 7.66. However, its operating margin of -16% is lower than 84.39% of companies in the Hardware industry. GuruFocus ranks Western Digital's profitability as fair.
Regarding growth, the company's 3-year average annual revenue growth rate of -11.6% is below 84.69% of its industry counterparts. Its EBITDA growth rate over the same period is 0%, which ranks lower than the industry average.
ROIC vs WACC
An effective way to gauge profitability is by comparing a company's Return on Invested Capital (ROIC) to its Weighted Average Cost of Capital (WACC). A company that has an ROIC exceeding its WACC is typically creating value for shareholders. Western Digital's ROIC over the past 12 months is -9.96, while its WACC is 10.68, suggesting that the company is not effectively generating cash flow relative to the capital invested.
Conclusion
In conclusion, based on GuruFocus' analysis, Western Digital Corp (WDC, Financial) appears to be significantly overvalued. The company's financial condition and profitability are considered fair, but its growth ranks unfavorably compared to industry peers. For those interested in a deeper understanding of Western Digital's stock and financials, a review of its 30-Year Financials is available here.
To discover high-quality companies that may deliver above-average returns, consider exploring the GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
