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Why Western Digital Stock Crashed 8% Today

By Rich Smith – Oct 29, 2021 at 11:51AM

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This isn't how earnings beats are supposed to work.

What happened

Shares of computer memory maker Western Digital (WDC 0.57%) tumbled 7.8% as of 10:50 a.m. EDT today after the company released fiscal first-quarter 2022 earnings results last night.

Heading into fiscal Q1, analysts had forecast that Western Digital would earn $2.11 per share pro forma on sales of $4.35 billion. As it turned out, Western Digital beat those predictions with a stick: Sales surged to $5.1 billion, and earnings on those sales came to $2.49 per share.  

Nevertheless, its stock is down today. Why?

White arrow declining sharply atop a stock tickertape display bathed in red.

Image source: Getty Images.

So what

First things first: While Western Digital reported a $2.49-per-share profit, this was a pro forma figure -- not calculated according to generally accepted accounting principles (GAAP).

GAAP profits for the quarter were actually only $1.93 per share -- still a vast improvement over Western Digital's GAAP loss of $0.20 per share in fiscal Q1 2021, but not quite the rich profits that the pro forma number suggests. Similarly, the company generated only $224 million in real free cash flow (cash profits) in the quarter, which was less than the $610 million in net income it earned, and far less than the company's $787 million in pro forma profit. So while Western Digital's profit performance in the quarter was good, it wasn't nearly as good as the headline figures suggest.

On the other hand, the company's 29% improvement in sales in Q1 was just as good as it looked.

Now what

Western Digital gave similar mixed signals on its guidance for fiscal Q2 2022, currently underway.

On the one hand, management forecast tremendous sales growth -- up as much as 25% year over year, according to data from S&P Global Market Intelligence, to a range of from $4.7 billion to $4.9 billion. The entirety of that range dwarfs the $4.6 billion in sales that Wall Street has been forecasting for the company. On the other hand, it said that its pro forma profits per share will be only $1.95 to $2.25 -- versus the $2.39 per share that Wall Street had been hoping to see.

In short, Western Digital promised Wall Street a sales beat but a rather sizable earnings miss in Q2. If you ask me, that's the real reason the stock is down today.

Rich Smith 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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