Western Digital's (WDC -0.14%) stock recently dipped after the hard drive maker turned in a mixed fourth-quarter report. Its revenue rose 18% annually to $4.29 billion, but missed estimates by $40 million. Its adjusted earnings per share jumped more than sevenfold to $1.23, thanks to an easy comparison to last year, and beat expectations by a penny.

WD's headline numbers looked stable, but its first-quarter guidance stunned investors. It expects its revenue to decline 3%-8% annually, far below expectations of 8% growth, and for its adjusted EPS to rise 32%-91%, versus expectations for 288% growth.

Four open hard disk drives placed on other closed ones.

Image source: Getty Images.

That big miss cut short WD's three consecutive quarters of positive revenue growth and indicates its cyclical recovery was short-lived. That bad news, along with WD's dividend suspension in May, explains why its stock declined more than 40% this year.

However, WD's stock now trades at just six times next year's earnings estimates -- which suggests it could still attract value-seeking investors. Let's examine the main challenges to see if WD will rebound later this year.

What happened to Western Digital?

Western Digital's revenue and earnings tumbled last year due to two main headwinds: it shipped fewer platter-based hard disk drives (HDDs) to PC makers and data center customers, and its flash memory business -- which sells solid-state drives (SSDs) and memory chips -- struggled with cyclically lower memory chip prices.

WD's five-quarter streak of year-over-year revenue declines ended in the second quarter of 2020. Its growth then remained positive over the following two quarters:

Growth (YOY)

Q4 2019

Q1 2020

Q2 2020

Q3 2020

Q4 2020







Adjusted EPS






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

Last October, then-CEO Steve Milligan claimed the flash memory market passed a "cyclical trough" during WD's first quarter. Milligan, who had led Western Digital since 2013, also announced his retirement during the same call.

At the time, Milligan's declaration about the flash memory market -- along with WD's stabilizing sales of SSDs to PC makers and data centers -- convinced me WD was on the cusp of a turnaround. I believed Western Digital's growth would improve, and that its high dividend and low P/E ratio would set a floor under the stock.

The COVID-19 crisis halts its turnaround

Unfortunately, the COVID-19 crisis prematurely halted Western Digital's cyclical recovery with supply chain disruptions and postponed orders.

In the fourth quarter, WD's HDD revenue declined 4% annually to $2.05 billion, and the segment's adjusted gross margin contracted from 28.1% to 27.2%. On the bright side, its flash revenue surged 49% to $2.24 billion, buoyed by shipments of new SSDs for upcoming game consoles, and the segment's adjusted gross margin expanded from 18.7% to 30.5%. Its total adjusted gross margin jumped from 24.2% to 28.9%.

Those numbers suggest WD's growing flash business will offset the slower growth of its HDD business, which faces tough competition from Seagate (STX). Unfortunately, WD's guidance for the first quarter indicates that 2020 will be another rough year.

During the conference call, Chief Financial Officer Bob Eulau said Western Digital remained "somewhat challenged in the near term" due to the pandemic and a "global economic contraction." Eulau expects the smaller client solutions business -- which sells its branded HDDs, SSDs, flash memory chips, and removable devices -- to grow in the first quarter.

However, he warns that growth will be "more than offset" by declining sales of its client devices -- which include drives for PCs, consumer electronics, embedded devices, and wafers -- and its data center storage solutions. Western Digital also expects its total adjusted gross margin to contract sequentially to 25%-27%, partly due to a "peak" quarter of higher expenses for its new K1 joint venture fab for flash memory chips.

Western Digital didn't offer any guidance for the full year, but Wall Street expects its revenue to decline 6% and for its earnings to rise 12%. That outlook isn't terrible, but there's not much incentive to wait for WD's turnaround to start up again -- especially when rival Seagate continues to pay a dividend of nearly 6% throughout the same downturn.

So should investors buy WD's stock?

I was bullish on Western Digital's prospects last year, but the COVID-19 crisis, WD's surprising dividend cut, and its sour guidance for the first quarter have all dampened my enthusiasm for this battered stock. Investors looking for a safer play on data storage devices should simply stick with Seagate, which pays a steady dividend, retains a strong presence in the cloud and data center markets, and generates most of its revenue from the stable HDD market instead of the volatile SSD market.