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How Western Digital Corp.'s Shares Fell 26% Last Month

By Anders Bylund – Nov 10, 2018 at 3:21PM

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Memory chips are putting pressure on the hard drive maker's entire product portfolio's street prices, with immediate effects on the company's total sales and profits.

What happened

Shares of Western Digital (WDC 7.08%) fell 26.4% in October 2018, according to data from S&P Global Market Intelligence. At the heart of the matter, you'll find a mixed first-quarter report tied to downright gloomy guidance for the next reporting period. The stock fell 22% the next day.

So what

The maker of hard drives and other data storage devices saw first-quarter sales fall 3.5% year over year to $5 billion, just below Wall Street's $5.1 billion consensus estimates. Bottom-line earnings fell 15% to $3.04 per share, right in line with analyst expectations.

However, second-quarter revenues were aimed at just $4.3 billion, 17% below the year-ago period's result and 18% below the average analyst projections at the time. Earnings for that quarter should land near $1.55 per share, 60% below the second quarter of fiscal year 2018 and roughly half of the analyst view.

Close-up shot of a traditional hard drive with its case opened, highlighting the magnetic media platters.

Image source: Getty Images.

Now what

Western Digital pointed to plunging prices of NAND memory chips as the main culprit behind its weak forecasts, a market trend with two painful effects on this company's business. First, Western Digital makes NAND chips for use in its solid-state storage devices, and a general downtrend in the component prices puts pricing pressure on the finished SSD products as well. On top of that, cheaper SSD storage allows that product category to cannibalize the traditional hard-drive lineup, where low cost per gigabyte of storage is the only remaining selling point. So Western Digital is feeling price pressure against its entire product portfolio, with direct effects on the top and bottom lines of its business.

The company is reducing its NAND manufacturing volume by 10% next year in an effort to control the pricing situation.

Analyst firm KeyBanc came to Western Digital's rescue at the very end of October, arguing that NAND prices should stabilize in 2019 followed by the strongly rising market demand for these chips in 2020 and beyond. As a result, KeyBanc analyst Weston Twigg sees "plenty of opportunity" for memory-sensitive companies like Western Digital in the long run. Share prices rose 14% on that report but remain 57% below their 52-week highs.

Anders Bylund owns shares of Western Digital. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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