The Wind Is at Western Digital's Back

Despite short-term volatility and unpredictability, the hard-drive maker is a good bet on an obvious industry trend: more storage needed.

Jan 27, 2014 at 3:00PM

Just a year ago (and starting well before), hard-drive companies were the subject of incessant analyst remarks regarding the death of the PC and how their demise was non-negotiable. Of course, these companies weren't actually in dire straits; like most conscious multibillion dollar organizations, they had positioned themselves to adapt with the rest of the world. Western Digital (NASDAQ:WDC) is firmly in this camp, and the market has taken notice over the past year -- sending the stock up steadily nearly 75% since January of last year. Western Digital continues to generate strong cash flow and looks to grow in the coming periods as its various businesses are firing on all cylinders. Here's what investors need to know.

Western Digital came in ahead of analyst expectations last week when it delivered a bottom line of $2.19 per share -- a full dime above estimates. From the year-ago number, earnings grew just under 5%. Sales outperformed as well -- beating both analyst and internal expectations with $3.97 billion.

The company shipped more hard drives than it had in 2013's fiscal second quarter, but at an average selling price of $61 -- one dollar less. Hard drive prices have fluctuated heavily for some time, often frustrating analysts and investors who try to model out the business.

Sequentially, Western Digital lost a few fractions of a point in market share (it and Seagate Technology trade points back and forth) to 44.4%, but remains nearly one point higher than its year-ago status.

Cash machine
During the quarter, Western Digital printed out $557 million worth of free cash flow.

As noted by Zack's in a recent report, the company may not see substantial free cash flow growth as it invests more and more into product diversification and innovation. Western Digital continues to expand its presence in cloud storage, small and midsized business applications, and solid-state drives (SSDs). SSDs are particularly compelling as the market has increased its rate of adoption given SSDs efficiency compared to legacy hard drives.

The road ahead
In contrast to those now-myopic reports, Western Digital has a long-term runway for growth that keeps the stock attractive at 9.85 times projected forward earnings. Though the hard drive and storage industry is fiercely competitive (and always ripe for disruption), Western Digital has proved to remain nimble and able to adapt to industry shifts.

Investors interested in the stock need to have a long-term mind-set, as Western Digital remains a highly volatile business to own in the short-term. Despite its consistent free cash flow generation and product innovation, the market reliably freaks out every time PC shipment data shows "faster than expected" drops. We know PCs are on their way out and so does Western Digital. There is plenty of business to compensate and replace it. An investment in Western Digital today is a confortable bet on the ever-expanding need for storage in a data-driven world.

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Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool owns shares of Western Digital.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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