I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Western Digital (NYSE: WDC). Is this maker of hard drives and other storage gear the real thing? Let's get to the numbers.

Foolish facts

Metric

Western Digital

CAPS stars (out of 5)

****

Total ratings

1,365

Percent bulls

94.5%

Percent bears

5.5%

Bullish pitches

200 out of 213

Highest rated peers

EMC Corp. (NYSE: EMC), Seagate Technology (Nasdaq: STX), SanDisk (Nasdaq: SNDK)

Data current as of Sept. 25.

Data storage is big business. According to the latest data from researcher IDC, the worldwide market for storage reached $3 billion in the second quarter, up 3.3% over last year's Q2. Western Digital is no bit player in this market. Plus, the stock is cheap.

"Hard drive makers are seeing insane valuations right now. Fact is, the threat of [solid state storage] is overblown. I don't deny that SSD's will have their place, but there still needs to be cheap ways to store data, especially in large enterprises. [Western Digital] trades at around 3.5 X EV/FCF, despite having a favorable outlook. That bargain basement price isn't deserved," my Foolish colleague, Eric Bleeker, wrote in July.

Equally interesting in the premium prices being paid for storage technology. Consider the $2.1 billion Hewlett-Packard is paying for 3PAR (NYSE: PAR). The message? Even good data storage concepts are worth more than they were a few months ago. At some point, this truth is likely to be reflected in the pricing of Western Digital's shares.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

152.4%

(41.2%)

135.4%

Revenue growth

32.2%

(7.7%)

47.7%

Gross margin

24.4%

17.9%

21.5%

Receivables growth

35.6%

(8.3%)

44.9%

Shares outstanding

231 million

225 million

224 million

Source: Capital IQ, a division of Standard & Poor's.

Or at the very least, investors should recognize the improving financial trends as reflected in this table. Let's review:

  • After a breather in 2009, Western Digital is once again seeing triple-digit gains in normalized net income.
  • What makes this interesting is that it's coupled with a healthy rise in revenue. Also, receivables and revenue growth are tracking about even -- a sign that Western Digital is able to convert invoices into dollars.
  • Most of all, I like the margin improvement. Not only are Western Digital's gross margins up over last year, but also over 2008 levels.

Competitor and peer checkup

Competitor

Normalized Net Income Growth (3 yrs.)

EMC

6.9%

Hitachi (NYSE: HIT)

9.1%

NetApp

20.8%

SanDisk

39.4%

Seagate Technology

34.2%

STEC (Nasdaq: STEC)

26.5%

Western Digital

51.7%

Source: Capital IQ. Data current as of Sept. 25.

According to this table, Western Digital is the best growth story in storage. That's saying something. SSD leaders SanDisk and STEC are in this table, as are Western's chief hard disk drive rivals: Seagate and Hitachi. Color me pleased.

Grade: Sustainable
Mix in the balance sheet strength to which Eric refers -- Western Digital had $2.73 billion in cash versus just $400 million in debt as of this writing -- and you've got a cheap stock with the resources to compete for the pole position in its market. As such, I've rated Western Digital to outperform in my CAPS portfolio.

Now it's your turn to weigh in. Do you like Western Digital at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring Western Digital:

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares of any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.