Data storage specialist Western Digital (NASDAQ:WDC) reported second-quarter results last Thursday. The report was a breath of fresh air, as the maker of hard drives and solid-state devices (SSDs) posted stable sales and pointed to a dramatic earnings jump in the next quarter.

Western Digital's second-quarter results by the numbers

Metric

Q2 2020

Q2 2019

Change

Analyst consensus

Net revenue

$4.23 billion

$4.23 billion

0%

$4.22 billion

GAAP net income (loss)

($139 million)

($487 million)

71%

N/A

Adjusted earnings per share (diluted)

$0.62

$1.45

(57%)

$0.58

Data source: Western Digital. GAAP = generally accepted accounting principles.

This quarter ended a long stretch of falling revenues. The last time Western Digital reported anything other than a year-over-year decline on the top line was the third quarter of 2018. Trailing sales fell 29% between that report and the fourth quarter of 2019, bouncing back to a smaller 25% drop three months ago. Thanks to a stable year-over-year trend in the second quarter, Western Digital is still looking at a 25% decline in trailing revenues from the peak in 2018, but the trend line is starting to point upward:

WDC Revenue (Quarterly YoY Growth) Chart

WDC Revenue (Quarterly YoY Growth) data by YCharts

Market trends

Management offered a handful of explanations for the solidifying top-line trends. Western Digital's hard drive manufacturing operations are more cost-effective than ever, new product launches have gone off without a hitch, and the market environment for flash memory chips -- which Western Digital uses to build SSDs -- is "improving."

The successful product launches included several high-capacity hard drives with 16 terabytes or more of magnetic disc storage space. The company also introduced a fifth-generation 3D flash memory technology, dubbed BiCS5. Sporting 112 stacked layers of storage space and tighter traces per layer, this architecture is 40% more space efficient than the previous generation's architecture of 96 layers. Western Digital will sample these modules in small quantities later this quarter, followed by mass-market production and BiCS5-based SSD products near the end of the calendar year 2020.

"As we enter the March quarter, flash pricing continues to improve," COO Mike Cardano said on the earnings call. "We believe inventory in the flash supply chain has returned to normal levels, and with strong demand for our products, we are experiencing pockets of tightness. These dynamics, combined with continued product execution in both flash and hard drives, position us well for continued profitable growth."

Close-up shot in dramatic lighting of a hard drive with the top cover removed.

Image source: Getty Images.

What's next for Western Digital?

The midpoints of management's third-quarter guidance pointed to revenues near $4.2 billion and adjusted earnings in the vicinity of $0.95 per share. These targets compare favorably to the year-ago period's results, adjusted earnings of $0.17 per share on sales of $3.67 billion. Western Digital also set its targets above the current analyst views, which called for earnings near $0.73 per share on sales of roughly $4.06 billion.

The company is heading into a period of high demand and tight supply in the flash-based SSD market, paving the way to both wider profit margins and rising sales. Meanwhile, traditional hard drives continue to stick around as a lower-cost solution for consumers and enterprises in need of massive storage spaces where data transfer speeds are less important.

These trends should do wonders for Western Digital's share prices over the next few quarters, lifting the stock from bargain-basement valuation ratios such as 8.8 times forward earnings while the earnings themselves also head higher. The same market trends also support the equally undervalued memory chip giant Micron Technology (NASDAQ:MU), which is trading at 9.8 times forward earnings today. As a shareholder of both Micron and Western Digital, I'm looking forward to the upcoming era of tighter flash chip supplies.