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Better Buy: Western Digital vs. Micron

By Leo Sun – Dec 2, 2019 at 12:15PM

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Which play is closer to a cyclical bottom?

Western Digital (WDC -0.03%) and Micron (MU -0.29%) both produce crucial components for PCs, mobile devices, and other electronics. WD is one of the world's largest manufacturers of HDDs (hard disk drives) and solid-state drives (SSDs), and Micron is a major manufacturer of NAND (flash memory) and DRAM memory chips.

Both companies struggled with a supply glut in memory chips and sluggish sales of PCs and mobile devices over the past two years. Yet both stocks also recovered this year on hopes for a cyclical recovery -- WD rallied nearly 40% this year as Micron rose over 50%. Does either stock have more room to run?

An illustration of a computer chip.

Image source: Getty Images.

How do WD and Micron make money?

Western Digital generated 60% of its revenue from platter-based HDDs last quarter, while the remaining 40% came from sales of SSDs and NAND chips.

SSDs store data on flash memory instead of platters, making them smaller, more power-efficient, and less prone to damage than HDDs -- but they're significantly pricier. To balance its business between the two, WD acquired SanDisk three years ago, and the $16 billion acquisition made it one of the world's top SSD and NAND makers.

Micron generated 63% of its revenue from DRAM chips and 31% from NAND chips last quarter. Micron is the third largest maker of DRAM chips in the world after Samsung and SK Hynix, and the fourth largest maker of NAND chips after Samsung, Toshiba, and Western Digital.

Which company is growing faster?

Western Digital and Micron both struggled with cyclical headwinds over the past year. WD's revenue growth declined year-over-year for five straight quarters:

YOY revenue growth

Q1 2019

Q2 2019

Q3 2019

Q4 2019

Q1 2020

Western Digital






YOY = Year-over-year. Source: WD quarterly reports. Fiscal quarters shown.

However, WD expects its second-quarter revenue to stay roughly flat annually, and grow 4% sequentially. It's attributing that rebound to warmer demand for both HDD and flash products, and CEO Steve Milligan proclaimed that the flash industry "passed a cyclical trough" during the company's conference call. Analysts expect WD's revenue to dip less than 1% this year and rise 9% next year.

Micron's revenue fell year-over-year for three straight quarters as the DRAM and NAND markets remained under pressure:

YOY revenue growth

Q4 2018

Q1 2019

Q2 2019

Q3 2019

Q4 2019







YOY = Year-over-year. Source: Micron quarterly reports. Non-GAAP. Fiscal quarters shown.

But flickers of a cyclical turnaround are also appearing for Micron. On a sequential basis, its DRAM revenue grew 1% and its NAND revenue rose 5% during the fourth quarter -- even after Huawei, one of its major customers, was added to the U.S. trade blacklist.

Micron expects its first-quarter revenue to decline 37% annually but rise 3% sequentially, which indicates that its declines are also bottoming out. Analysts expect Micron's revenue to fall 12% this year but rise 22% next year as the memory market warms up again.

Four platter-based HDDs.

Image source: Getty Images.

Profitability and valuations

WD and Micron are both generating dismal earnings growth. WD's non-GAAP earnings plunged 89% annually last quarter as Micron's earnings tumbled 84%. 

Yet WD's declines are bottoming out. It expects its EPS to decline 62% annually in the second quarter, but that also marks 62% growth from the first quarter. Meanwhile, Micron expects its earnings to decline 85% annually and 18% sequentially in the first quarter.

Analysts expect WD's earnings to plunge 46% this year, and for Micron's to tumble 61%. But looking further ahead, both companies' earnings should recover as their cyclical revenues rebound:


EPS growth forecast (next FY)

Forward P/E ratio

Western Digital






Source: Yahoo Finance, Nov. 28.

Investors should always take analysts' forecasts with a grain of salt, but both stocks still look cheap relative to their forward earnings growth. WD's downside is further limited by its forward dividend yield of 4%, while Micron doesn't pay a dividend.

The winner: Western Digital

WD and Micron both have room to run, but WD is clearly a stronger pick than Micron. It has a better diversified business and a slightly lower valuation, pays a generous dividend, and seems closer to a cyclical rebound than Micron. Micron will likely become the better growth stock once DRAM and NAND prices fully recover, but WD remains a safer bet in a wobbly market.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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