Western Digital Corporation (WDC 2.44%) operates in one of the most competitive landscapes in the data management and storage industry, with rivals including Seagate Technology (STX +0.00%) and Micron Technology (MU +0.01%). The business has evolved a lot since it was formed nearly 50 years ago, and it now boasts one of the tech industry's most valuable patent portfolios, with more than 14,000 patents worldwide.
Investors saw significant growth from the company's stock in 2019, with its value increasing by more than 70%. Second-quarter earnings results released Jan. 30 continued this trend; revenue estimates of $4.2 billion were up 5% from the previous quarter, and earnings per share (EPS) of $0.62 beat analyst expectations by $0.04. These results reflect the progress being made in two of the company's strongest divisions: hard disk drives (HDDs) and flash technology (which is considered faster than HDDs and provides better performance).
With 2020 in full swing, where does Western Digital stack up against its competition?
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Head-to-head in HDD
Western Digital and Seagate Technology are fierce competitors in the hard disk drive (HDD) market, where both companies are considered leaders.
TrendForce market research estimated fourth-quarter 2019 shipment data from the three big players in the HDD market (Western Digital, Seagate, and Toshiba). They found that Seagate currently holds the lead at 41% of the market, followed by Western Digital (38%) and Toshiba (21%). However, the strength of the HDD market has been declining in recent years. TrendForce saw a 50% drop in shipments from data collected between 2012 and 2019.
That drop might sound alarming, but investors need not worry. Over those seven years, technology -- particularly cloud technology -- evolved greatly, and consumers followed with a shift from physical storage to digital. As the amount of data we produce and consume continues to increase, more high-capacity HDDs may be needed in data centers. But as Seagate noted in its annual report, as demand for high-capacity drives increases, total HDD units sold may decline. Therefore, both Western Digital and Seagate market have turned their attention to solid state storage (SSD) and flash technology for enterprise or cloud markets.
In its most recent earnings call, Seagate's management reported that revenue was down 3% from the previous quarter, even as the company achieved a record shipment of exabytes (an exabyte is equivalent to 1 billion gigabytes). This may reflect the growing trend toward high-capacity drives.
Western Digital may have an advantage over Seagate here; while Seagate has mainly focused on HDD, SSD, and a few other technologies, Western Digital's attention to flash storage can provide extra revenue and differentiate it from competitors.
Going forward, Western Digital's goal is to expand market share to 20% of the SSD market (it's currently 17%). The company's acquisition of SanDisk in 2016 gives it an edge over Seagate in terms of SSD market share, and another key catalyst that may boost revenue is the upcoming release of new gaming consoles that will increase the number of exabytes shipped. COO Michael D. Cordano noted in his recent earnings call "that starting June quarter, we expect to begin shipments into a new gaming platform," adding that "the gaming console market is expected to be a multi-exabyte opportunity this calendar year."
Although multi-exabyte shipments brought Seagate's margins down, the multi-exabyte opportunity for Western Digital should increase demand in enterprise areas such as data centers. Cordano also noted that "our competitive position within the data center is unrivaled, built on breadth of product portfolio, strong customer relationships, technology leadership, and superior product quality. We look forward to another year of strong growth in the data center market." This should help to raise the stock price over time.
Face-to-face on flash tech
Western Digital faces significant competition with Micron Technology (MU +0.01%) on the flash technology front. Both companies have products in SSD and NAND (a kind of flash memory that's non-volatile, meaning it doesn't need to be powered on to work -- think USB flash drives). Micron offers Dynamic Random Access Memory (DRAM) products as well, while Western Digital does not. DRAM is volatile memory, and it's used more often in PCs.
Micron's Revenue by Technology, Q1 2020
| Technology | Percentage of Revenue |
|---|---|
|
DRAM |
67% |
|
NAND |
28% |
|
Other |
5% |
|
Total |
100% |
SOURCE: Micron Technology
Western Digital's Revenue by Technology, Q2 2020
| Technology | Percentage of Revenue |
|---|---|
|
HDD |
57% |
|
Flash |
43% |
|
Total |
100% |
SOURCE: Western Digital
As these tables show, Micron's key revenue driver is DRAM, followed by NAND; Western Digital's key revenue driver is HDD, followed by Flash Technology (SSD, NAND). Like Western Digital, Micron has been through some industry downturns recently, but both companies expect to rebound in the new year with increases in the demand for and prices of their products.
NAND may be positioned for faster growth, especially in the near term, which should help boost revenue for both Western Digital and Micron. As noted, the introduction of new gaming consoles will increase demand for SSD and NAND memory later this year, and Western Digital may have an advantage there because of its diversified portfolio in HDD, SSD, and NAND.
Evaluating the valuation
To get a better sense of what the market expects, it is important to review each company's forward price-to-earnings (P/E) ratio. P/E measures a company's share price relative to per-share earnings, and a higher number implies that the market thinks the company is likely to see growth. Western Digital's forward P/E ratio is 8.9; compared with Micron at 10.8 and Seagate at 10.3, Western Digital may offer better value for investors.
Where does it stack up?
Western Digital offers investors a diversified portfolio of offerings focused on products in HDD, SSD, and NAND. The 50-year-old company boasts a unique patent portfolio that may also offer additional revenue streams through its licensing and royalties. The introduction of new gaming consoles this year, and related demand for NAND and SSD, will be key catalysts for the company.
As COO Cordano noted, Western Digital's client devices division, which made up 42% of revenue in Q2 2020, is expected to begin shipments into a new gaming platform in the June quarter (though this area could be fair game for all competitors). Another key thing to watch is Western Digital's data center business, which made up 35% of revenue in the quarter and is expected to expand its market share to 20% in the new year. Given all of this, Western Digital looks like a tech stock that's positioned for long-term success.
