I have a small obsession with tracking the best-performing stocks in the S&P 500. I want to know why they were winners, so that I can better identify future winners.
Among stocks that were in the S&P 500 index for the entire year, Nvidia was the best performer in 2023 and in 2024. But here in 2025, a new artificial intelligence (AI) company is sprinting toward first place: Western Digital (WDC +0.73%).
Some might object to calling Western Digital an AI stock. After all, the company has been around since 1970, and it went public in 1978, which well precedes the AI era. But keep in mind that from 2014 through 2024, this stock went absolutely nowhere. And now it's suddenly up about 250% year to date, catalyzed by the AI trend.
Image source: Getty Images.
Considering it's leading the way in the S&P 500 in 2025, now is a good time to get to know Western Digital and decide whether or not it could still be a stock to buy.
How Western Digital makes money
Western Digital focuses on hard disk drive (HDD) memory products -- it spun out its flash memory business earlier this year. Much of its business today is in the cloud. As tech giants build data centers, they need memory products, and HDD is well-suited for storing data at high volumes.
The 20-year chart below illustrates how Western Digital's business has historically worked. It's common for demand for memory products to rise and fall. When demand is high, revenue surges and profit margins expand. But when demand drops, Western Digital can swing to steep losses.
Data by YCharts.
Again, this isn't a Western Digital problem per se. I could substitute many players in the memory space into the chart above, and the trend lines would be similar. It's just normal cyclicality with a semiconductor stock.
The profit margins can be quite good for Western Digital when things are going well. In fact, it has a trailing-12-month operating margin of 23% right now. That's a great business. The key is understanding that it's not always this good. And management needs to manage the business through the entire cycle to avoid big losses when demand cools.
Is Western Digital stock a buy now?
Even though Western Digital stock has skyrocketed in 2025, the valuation is still cheaper than your average S&P 500 stock. As of this writing, it trades at just 23 times earnings and 21 times forward earnings. That doesn't look unreasonable on the surface, but there's more to consider.
NASDAQ: WDC
Key Data Points
Investors need to remember that Western Digital's profits are elevated right now. The question is whether the AI trend can lift memory demand higher and, if so, how long will demand keep surging? In other words, how long will this cycle last, and how big will it be?
As excited as investors are for AI infrastructure ideas, I think many are still underestimating the upside with memory. Perhaps they're underestimating memory because they have memories of past down cycles in the space. But I believe agentic AI can make things different this time, pushing the cycle higher for longer.
Large language models (LLMs) have their own memory needs. But agentic AI is where the market is headed now. The idea is having an AI agent that can do things on your behalf. The tech giants want these AI agents to be personalized, learning your needs, preferences, and more. This dramatically increases the need for memory products; an AI agent needs a long-term memory if it's going to be personalized to you.
Western Digital's fiscal 2026 (which started in October) is off to a good start, and management is expecting a roughly 20% growth rate and a gross margin of around 44%, which would be a record. In short, things are shaping up quite nicely for the next year.
And beyond this year as well. Western Digital's management says that some of its customers have already made their orders for calendar 2027. In other words, it appears that the data center build-out trend marches on, and red-hot demand for memory products isn't about to cool off.
Western Digital is using its surging profits to reward shareholders. It's paying down debt, repurchasing shares, and even initiated a dividend after a multiyear hiatus.
Data by YCharts.
Personally, I believe that Western Digital stock has more upside from here because I believe that the agentic AI trend is underappreciated. That said, it's still important to remember that demand will eventually cool, and Western Digital's business will likely return to more historical trends. It's a matter of "when." But I believe the "when" is still multiple years into the future.
