What happened

Things are not looking good in computer land this morning. In early trading, shares of Western Digital (WDC 1.82%), a manufacturer of computer hard disk drives and solid state drives, plunged more than 10%. The stock has recovered somewhat since, but remains down 8.2% as of 3 p.m. ET. Worse, the damage seems to be spreading throughout the computer hardware industry, with shares of semiconductors specialist Intel (INTC) tumbling 3.3%, and Qualcomm (QCOM 1.37%) following everyone else lower -- down 3.8%.

So what

This morning, Goldman Sachs (GS -0.21%) downgraded Western Digital stock from neutral to sell and cut its price target 28% to just $31 a share. (For reference, Western Digital costs about $33.50 right now, so it may have more room to fall.)

The price of NAND (flash) memory is falling, warns Goldman in a note covered by StreetInsider today, putting "both revenue and operating profit under pressure" at Western Digital. Gross profit margins appear to be at particular risk, with the banker warning that Western Digital is getting only 28% adjusted gross margins now -- and these could fall to 17% in 2023. Earnings before interest, taxes, depreciation, and amortization (EBITDA) will probably be negative throughout 2023, only turning positive again in 2024.  

Now what

Goldman Sachs isn't the only analyst thinking along these lines.

Reviewing estimates on S&P Global Market Intelligence, it appears that the consensus on Wall Street right now is that Western Digital's revenue, which declined in both of the last two quarters, could fall as much as 29% next year. Shipments of HDDs and SSDs for server storage, says TF International Securities, will decline only 10% to 15%, so a 29% decline in revenue would imply that Western Digital will both sell less stuff and also charge less for what little it sells.

It's no surprise then that earnings are expected to turn negative with a $1.14 per share loss under generally accepted accounting principles (GAAP), and investors should prepare to see Western Digital burn cash, too -- as much as $931 million in negative free cash flow.

Neither is it a surprise that investors elsewhere in the hardware space are taking the hint that what's bad for computer memory sales will probably also be bad for sales of semiconductors manufactured by Intel and Qualcomm. While today's warning concerns mostly Western Digital in particular, it's looking like 2023 is going to be a rough one for the computer industry in general.

So what's the biggest lesson investors should take away from all of this? Right now, shares of semiconductor and memory chipmakers look enticingly cheap -- but this is based on trailing earnings numbers. Western Digital sells for a lowly 12.3 times trailing earnings currently. Qualcomm costs only 10.7 times trailing earnings. And Intel appears to be a basement bargain at just 8.8!

Look 12 months ahead, however, and forward earnings multiples jump sharply, with Intel costing 15 times forward earnings and Western Digital at a nosebleed 94 times earnings, en route to infinity if earnings turn negative as expected. Of the three, Qualcomm is really the only stock that looks at all "safe," with a forward P/E of 12.2, which is not too much more expensive than its current valuation.

With a 2.4% dividend yield and long-term earnings growth estimates of 23% annualized, Qualcomm might be your safest port in which to ride out this semiconductor storm.