What happened
Shares of Western Digital (WDC 1.51%) rose 14.4% in May, according to data from S&P Global Market Intelligence.
Western Digital had already reported earnings heading into the month, but its May surge came after a prominent activist investor disclosed a $1 billion stake in the beaten-down hard disk drive and NAND flash producer.
Western Digital's undemanding valuation and the involvement of a prominent activist caused the stock to surge, as investors made the idiosyncratic bet the activist's proposed plan could unlock value.
So what
On May 3, prominent activist investor Elliott Management sent a letter to Western Digital's board, proposing that the company split up its hard disk and NAND flash businesses. Western Digital, a hard disk maker, had acquired SanDisk, a producer of NAND flash, back in 2016 for a hefty price. Elliott's argument is that the benefits and synergies between the hard disk and NAND flash businesses have failed to materialize, since they're different technologies.
Should the split happen, Elliott believes the "conglomerate discount" will disappear for Western Digital. Based on other industry competitors, Elliott believes the two businesses would have a combined value of $104 per share as two separate businesses, as opposed to the company's current valuation around $60.
Image source: Getty Images.
Now what
It's unclear if Western Digital will go for the split; however, new CEO David Goeckeler had already split the two businesses into separate reporting units shortly after he took the job in June 2020. Therefore, there seems to be a good argument for it.
The NAND flash industry has been less profitable than the hard disk and DRAM industries in recent years, despite lots of growth. This is probably because there are more NAND flash producers, with about six major players, as opposed to three major producers in hard disks and DRAM.
Consolidation is probably a good idea for the NAND industry, so Western Digital could probably fetch a good price for the SanDisk business.
Still, the stock remains stuck in the doldrums, and trades at just 10 times trailing and six times forward earnings. Long-suffering shareholders haven't really participated in the semiconductor industry's gains over the past five years, so this would be a good solution if workable. Therefore, I wouldn't be surprised if management adopts Elliott's plan. Even if it doesn't, the stock is definitely cheap at these prices, as demand for data storage only continues to grow.
