Western Digital (NASDAQ:WDC) stock is having a miserable month. After shooting skyward early in July, Western Digital stock plummeted 12% in response to Q4 earnings last week -- and hasn't looked back (or up) since.

Despite reporting 9.5% sales gains last week, pro forma earnings at the hard disk drive-maker plummeted 38%. Management added insult to injury when it warned investors that the current quarter will look much like the last. Revenue may come in ahead of guidance, but profits will once more fall short -- which did not much please investors.

At last report, Western Digital stock had given up 17% of its market cap since earnings came out, and according to one analyst, the selling isn't done yet. This morning, Goldman Sachs announced that even after its 17% price cut, Western Digital stock still isn't cheap enough to own. Instead, the megabanker advised its clients to sell Western Digital.

Here are three things you need to know.

Goldman Sachs counts more zeros than ones in Western Digital stock's future. Image source: Getty Images.

1. The first step (down) was a doozy. The next could be just as big.

According to Goldman, the 17% drop that Western Digital stock suffered last week was only the beginning of the bad news. In a new report covered on StreetInsider.com just yesterday, Western Digital's next leg down could be just as steep as the last one -- and Western Digital stock could fall as far as 16% lower, to crash-land at $38 a share.


2. NAND is a four-letter word.

Goldman points the finger directly at "NAND margin risk," warning that across the semiconductor industry, companies are growing capital spending by as much as 50% this year, setting themselves up for systemic oversupply in 2017. Additionally, new developments such as 3D NAND are shaking up the industry and making ordinary NAND obsolete.

"WD is behind Samsung in 3D NAND," warns Goldman, and to fix this, is "trying to ramp quickly, which we believe creates yield risk," in the analyst's estimation. At the same time, China is rushing to compete on NAND memory, which is contributing both to the capital expenditures explosion, and to the risk of global oversupply -- which will hurt profit margins across the board.

3. How bad will this get?

Despite its disappointing guidance, Western Digital may benefit in the short term from what Goldman calls "likely tight near-term HDD and NAND supply/demand." But longer term, Goldman believes the real damage is yet to come.

The analyst sees Western Digital earning 37% less profit than most analysts on the Street expect -- just $3.45 per share -- and then earning $3 a share in fiscal year 2017. (Note that Western Digital operates on a calendar where the years end mid-calendar. "Fiscal year" 2017, therefore, is already under way, and in fact began back on July 1.)

Timing may be everything

So is Goldman Sachs right to tell investors to sell Western Digital stock today? The answer may depend on your time frame. According to the analyst, Western Digital will earn $3 this fiscal year, and at today's share price of just under $45, that works out to a P/E ratio of 15 on the stock.

Farther out, however, Goldman Sachs -- despite telling you to sell today -- sees Western Digital's earnings rising to $4.55 in fiscal 2018, then $5 a share in fiscal 2019. Translation: In just over two years' time, Western Digital could report profits nearly 5 times the $1.06 that it has earned over the past 12 months, and so it sells for a P/E ratio of just 9 times those projected FY 2019 earnings.

Call me crazy, but if it truly is able to grow so fast from this year's projected low, then that doesn't sound like such a very high price to pay for Western Digital stock. And with the stock paying you a beefy 4.3% dividend yield in the meantime, it may just pay to be patient -- and not sell Western Digital stock at all.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.