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Western Digital Slips Despite EPS Beat and Raise - Buy Time?

Photo of hard disk drive hdd, solid state drive ssd and ssd m2 isolated. Western Digital Analysis: Time to Buy After Earnings Surprise?Data storage solutions device maker Western Digital Co. (NASDAQ: WDC) is benefitting dramatically from the secular tailwinds of artificial intelligence (AI) adoption.

Storage companies in the computer and technology sector were in a drought, experiencing an inventory glut after the post-pandemic hangover until the AI boom distinctively materialized in 2024. WDC completely reversed its fortunes, turning a fiscal Q2 2024 EPS loss of 69 cents to a Q3 2024 EPS profit of 63 cents, crushing consensus estimates by 41 cents.

The AI boom took Western Digital from a valley back up towards the peak again. Incidentally, the market initially sold off the earnings report, gapping shares lower the following morning, presenting investors with an undeniable buying opportunity.

Reversal of Fortune Driven by AI Deployments

[content-module:CompanyOverview|NASDAQ:WDC]Comparing Western Digital's fiscal Q2 2024 to Q3 2024 performance contrasts with the exceptional reversal of fortune that the AI boom has brought. Revenues went from falling 2.4% YOY in Q2 to surging 23.3% YOY in Q3 2024. EPS completely reversed from a loss of 69 cents to a profit of 63 cents, which exceeded the 20 cents raised guidance it forecast earlier. This dramatic reversal of fortune was driven by AI applications requiring data storage capacity and, most importantly, speed.

Speed is the Name of the Game

In addition to NVIDIA Co.'s (NASDAQ: NVDA) powerful line of GPUs, AI deployment requires data storage capacity and speed. Western Digital is one of the leaders in NAND flash memory devices like solid state drives (SSD). With no moving parts like hard disk drives (HDDs), SDDs are lightning-fast and are being swallowed up by AI deployment. The only thing hampering growth at this point is the supply constraints in the industry, which are also continuing to improve.

Knocking the Cover Off the Ball Out of the Stadium

On April 25, 2024, Western Digital crushed EPS expectations of 22 cents by delivering EPS of 63 cents, beating consensus estimates by 41 cents. Revenues surged 23.3% YoY to $3.46 billion, beating $3.37 billion consensus analyst estimates. 20% revenue growth YOY was driven by bit demand for its flash-based solutions and an increase in average selling prices (ASPs).

The consumer segment experienced a 17% YOY growth driven by its premium SanDisk brand. This more than offset the decline in HDD demand. Enterprise SSD solutions demand had a noticeable spike in Q3. Demand is returning for NVMe SSDs and in higher capacities for AI-related applications.

Chart showing how Western Digital beat Q3 2024 EPS estimates and raised guidance, but the market gapped down shares which eventually rallied.

Daily Descending Triangle Breakout

The WDC daily candlestick chart illustrates a descending triangle pattern that is attempting to break out. The upper descending trendline formed at the $76.92 swing high, capping bounce attempts at lower highs heading toward the apex point. The lower flat-bottom trendline is at $65.23. Shares gapped down to $65.23 on the stellar fiscal Q3 2023 earnings report, but buyers scooped up mispriced shares, eagerly pushing WDC to the upper descending trendline.

Shares punched through the upper trendline resistance the following day as WDC attempted to break out of the descending triangle. The daily relative strength index (RSI) bounced back up to the 60-band. Pullback support levels are at $70.06, $67.74, $65.23 and $63.09.

HDD Improving Unit Economics

While HDD is not as suitable for AI due to its slower speeds, its massive capacity is still ideal for data centers and enterprise solutions. The restructuring has improved unit economics with greater visibility. HDD growth is expected as cloud demand recovers, especially due to the supply-constrained environment and better pricing. Cloud data centers predominantly still use HDDs due to their capacity and value. Over 90% of cloud data centers store their data on HDDs and only 10% on SSDs. Competitor Seagate Technology Holding plc (NASDAQ: STX) is the leader in HDDs

The Early Innings of AI Adoption

Western Digital CEO David Goeckeler summed it up: “The uptick in AI adoption is highlighting the incredible value of data and will drive increased storage demand across both HDD and flash at the edge and in the core, providing greater long-term growth and margin expansion opportunities for Western Digital.”

Goeckeler pointed out, “We are in the early innings of unlocking the full potential of this company, and our team remains focused on improving the profitability of our business to drive long-term margin expansion and shareholder value as these new demand opportunities present themselves.”

The Benchmark Co. upgraded shares of Western Digital to a Buy from Hold with an $85 price target. Western Digital analyst forecasts and price targets are at MarketBeat.

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