Western Digital Looks Like a Solid Long-Term Investment

Western Digital’s strong balance sheet and superiority over Seagate give it more room to flex its muscles in the storage market.

Apr 14, 2014 at 8:30PM

Data storage company Western Digital's (NASDAQ:WDC) shares were up by double-digits this year before being hit by the recent sell-off in tech stocks. However, the company has consistently performed well in the past few quarters, beating rival Seagate Technology (NASDAQ:STX) this year, and its prospects look strong due to the expected growth in its business going forward.

Investors should consider taking a close look at Western Digital for their portfolio since the company could be a long-term winner. Let's see why.

Pulling ahead
Western Digital is seeing strong momentum across its product portfolio. The company has a 45% share of the storage market, pulling ahead of Seagate's 40% market share. In the fourth quarter of last year, the total addressable market, or TAM, for hard drives grew by 6 million units year over year to 142 million.

That exceeded Western Digital's expectations for the quarter, in which it shipped roughly 63 million units. A robust performance from the gaming segment and a seasonal pickup in sales of branded products were tailwinds for Western Digital. Looking ahead, the company expects this momentum to continue with an increase in total exabytes shipped.

Western Digital took good advantage of this TAM growth, reporting almost 4% growth in quarterly revenue and a 29% boost in earnings, year over year. On the other hand, Seagate's market-share loss led to a 4% drop in revenue, while earnings were down 13% year over year. 

New products and a strong market
Western Digital also sees good opportunities in fast-changing information technology infrastructure as cloud computing gains steam. The company aims to add more value to its products and offer more customization levels to customers to tap the growth of this market.

In addition, Western Digital's focus on new products is also bearing fruit. Its WD My Cloud, a comprehensive cloud solution, and HelioSeal, a six-terabyte helium-based sealed drive, are attracting many customers.

Western Digital's enterprise-class solid state drives, or SSD, are also selling well. According to management, in the last quarter, Western Digital's enterprise revenue grew at a faster rate than the overall SSD enterprise market. The company has made some good moves in this department that are driving results, such as the 2013 acquisitions of Virident and sTec.

The sTec acquisition enabled Western Digital to gain hold of more than a 100 SSD-related patents, while Virident helped it strengthen its position in flash storage hardware and software. Furthermore, as Western Digital continues integrating these new acquisitions into its business, it should attract more customers to its product offerings.

In a strong position
Western Digital anticipates improvement in the global economy, while stabilization of the PC market should also help its prospects. With investments to be made across the product portfolio, Western Digital looks set to perform well going forward.

In addition, Western Digital's strong balance sheet gives it more opportunities to make acquisitions and invest in research and development. Western Digital has $4.7 billion in cash and debt of $2.3 billion. Its debt-to-equity ratio is 27. By comparison, Seagate carries debt of $3.6 billion and a weak cash position of $2.3 billion. Seagate's debt-to-equity ratio is also a sky-high 143. 

Foolish takeaway
Western Digital's superiority over Seagate places it in a strong position to benefit from growth in the storage market. The company has made smart acquisitions and is focusing on product innovation and improving its standing. Investors should use the recent tech sell-off as a buying opportunity in Western Digital.

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Mukesh Baghel 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.

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