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Why Shares of Western Digital Fell 13.4% in October

By Billy Duberstein - Nov 9, 2019 at 9:00AM

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The storage giant fell on a disappointing earnings report.

What happened

Memory giant Western Digital ( WDC 1.00% ) was down 13.4% in October, according to data from S&P Global Market Intelligence, as the stock fell following the earnings report for its first fiscal quarter of 2020 was issued late in the month. Though the company's revenue and  earnings per share (EPS) numbers beat expectations, management gave somewhat disappointing guidance, adding to the uncertainty surrounding the memory recovery in the technology space, and leading to the sell-off.

In addition, Western Digital's CEO announced his retirement, heaping more uncertainty on the situation. 

Four hard disk drives on a table

Image source: Getty Images.

So what

The company's guidance for just $0.45 to $0.65 in adjusted (non-GAAP) EPS underwhelmed some who were expecting more. Storage and memory prices have continued to decline in 2019, but Western Digital's stock is still up some 48% on the year even after the sell-off, which indicates that many were optimistic the memory recovery was a little further along.

WDC Year to Date Total Returns (Daily) Chart

WDC Year to Date Total Returns (Daily) data by YCharts

In addition, CEO Steve Milligan announced he was retiring, after having been CEO for seven years and with Western Digital since 2002. Though the uncertainty likely didn't help Western Digital, Milligan will stay on the job until his successor is found.

Now what

Though Western Digital's profit guidance underwhelmed, there were actually a couple of valid reasons for the slight disappointment. The current quarter's profit will be suppressed by some start-up costs for the company's new K1 fab, as well as a large mix shift to lower-margin NAND, which is growing faster than hard disks. 

After the sell-off, Western Digital's stock also appears fairly cheap, at just 8 times 2021 earnings estimates.  The memory cycle is taking a longer time to bottom out than some would like, but long-term investors may wish to give Western Digital a look after this recent sell-off.

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.

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