Is Western Digital Still a Good Buying Opportunity?

Western Digital (NASDAQ: WDC  ) shares have soared nearly 150% since 2013 behind its success in finding new products and services in the hard disk drive, or HDD, market, including the rise of hyperscale data centers and cloud computing. The company has had to evolve from being a sole beneficiary of the PC market, but with guidance from Hewlett-Packard  (NYSE: HPQ  ) and earnings from Intel  (NASDAQ: INTC  ) , the company's outlook is far more certain. But, is it still a buy after large gains?

The business model
Western Digital is a large manufacturer of hard disk drives, which are used for storage primarily in PCs and laptops. As most are aware, PC and laptop sales have fallen drastically in the last few years due to the rise of mobile computing. Therefore, Western Digital has had to find new revenue-generating segments in the storage space.

In 2010, the majority of Western Digital's revenue came from PCs and laptops, but now 53% comes from non-PC applications. Essentially, it has been this new source of revenue that has driven the stock higher over the last few years.

New business opportunities emerge
One way that Western Digital has thrived is in the solid state drive, or SSD, market, which is storage used primarily in smartphones and tablets. In its last quarter, the company's SSD revenue grew 46% to $134 million, but still accounted for less than 5% of total sales.

The company has also benefited from the cloud. While the cloud is not physical storage for the consumer, the information itself must be backed up, and Western Digital provides the most efficient technology for that task.

On Wednesday, Western Digital's share price reached new highs after Baird upgraded shares to outperform, with a $125 price target. The reason was strong traction and usage among hyperscale data centers, which are used by large Internet-based companies that use significant loads of data .

Here comes the other half
In retrospect, Western Digital hasn't really grown organically, but the rise of new segments has at least slowed the bleeding of PC and laptop losses. However, there are now concrete reasons to believe that the worst is over for PCs, and that a recovery could soon occur.

Quarter/Year

Year-Over-Year Loss

Q3/2013

(7.6%)

Q4/2013

(5.6%)

Q1/2014

(4.4%)

Q2/2014

(1.7%)

As you can see, the rate of decline in global PC shipments has slowed in recent quarters, and is now nearly flat. Not to mention, both Hewlett-Packard and Intel have further supported this theory.

In May, Hewlett-Packard released its second-quarter report, which showed that revenue from PCs increased 7% year over year. This represented a rather significant improvement from the first quarter's 4% bump, and was driven by a whopping 12% increase in enterprise use. Albeit, with PCs accounting for nearly 30% of the company's total revenue, shares have soared as the company provides new hope of a PC-recovery.

In regard to Intel, the chip leader raised revenue guidance in June by nearly $1 billion on better-than-expected PC demand. Then, on Tuesday, the company announced earnings that showed 6% year-over-year growth in its PC client group segment, which makes up 63% of total revenue. Like HP, this showed a far improvement over the prior quarter, where the segment's revenue declined 1.5%.

Combined, HP and Intel's strong fundamental performance in the PC sector is a great sign for Western Digital, a company that's not as reliant on PCs for fundamentals as in the past, but still has the capabilities and infrastructure to handle increased demand.

Foolish thoughts
In retrospect, the growth of PCs is not just something that will positively affect Western Digital, but also HP and Intel in the quarters ahead. Western Digital, HP, and Intel are trading at 12, 9, and 16 times forward earnings, respectively, which isn't excessive in this market.

With all things considered, all have upside potential, but the fact that Western Digital has found growth in outside industries bodes well for the stock in the event of a turnaround. Because after all, PC strength is no longer a necessity for Western Digital, but rather a luxury that can, in fact, take shares significantly higher long-term.

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