What happened
Shares of Western Digital (WDC +3.78%) fell by 20.7% in January, according to data from S&P Global Market Intelligence.
Tech stocks, even those in the booming semiconductor sector, largely fell last month as inflation remained hot, leading investors to react to the looming prospect of higher interest rates. Additionally, Western Digital delivered a quarterly earnings report that came with softer-than-expected guidance, even if revenue and earnings beat expectations.
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So what
In the period that ended Dec. 31 (Western Digital's fiscal 2022 second quarter), revenue came in ahead of analysts' consensus expectation of $4.83 billion, and its adjusted (non-GAAP) earnings of $2.30 per share topped the consensus prediction as well. Management noted that demand remains strong for its hard disk drive and NAND flash storage products, but also said that supply chain issues and raw materials disruptions were interfering with operations and holding back results.
Those were also the reasons given for its somewhat lackluster guidance for the March quarter: Management called for slight sequential declines in both revenue and adjusted earnings, to $4.55 billion and $1.65 per share, respectively, at the midpoints of its guidance ranges. In addition, management also said on the conference call with analysts that higher COVID-19 related costs last quarter amounted to $70 million, and that those would continue in the March quarter, though at a somewhat lower level.
Western Digital also announced Chief Financial Officer Robert Eulau would be stepping down. He'll be replaced by Wissam Jabre, previously the CFO at Dialog Semiconductor. There wasn't any specific reason given for Eulau's departure, and there's nothing here to indicate that anything's wrong with the company. Still, any C-suite resignation usually makes at least a few investors skittish. Given the generally fearful mood in the markets in January, it was no surprise that Western Digital sold off further on that announcement.
Now what
Western Digital now looks cheaper by conventional metrics, trading at just 8.2 times trailing earnings and 6.4 times next year's expected earnings. It has also been paring down its debt load since it cut its dividend back in 2020, but now that management's target debt level is within reach, CEO Dave Goeckeler said Western Digital may begin returning cash to shareholders in fiscal 2023.
While Western Digital's stock has historically been very cyclical and prone to booms and busts, that's also a reason the stock is so cheap. If we assume management is being forthright and that supply chain disruptions are the main cause of its muted guidance, those delayed sales will eventually come through, as long as demand remains strong.
While it's not my favorite chip stock, Western Digital does look cheap, especially given the ever-growing need for more data storage. It could make a good value investment for aggressive investors following its January slide.
