Monday - Raymond James has downgraded shares of Western Digital Corp. (NASDAQ:WDC) from Outperform to Market Perform, citing concerns over the company's current valuation. The firm points out that despite positive expectations for the Hard Disk Drive (HDD) and NAND markets, Western Digital's stock price has exceeded their target, prompting a reassessment of its rating.
The analyst from Raymond James noted that the stock is trading at eight times its prior peak earnings per share (EPS), which suggests that the market has already accounted for a reasonable recovery in both the HDD and NAND sectors. A Sum of the Parts (SOTP) analysis, considered more fitting due to the anticipated separation in Western Digital's business, indicates less than 10% upside potential.
This is under the assumption that the HDD segment will trade similarly to its competitor Seagate Technology (STX) and that the NAND business will be valued at roughly half the enterprise value to sales (EV/S) ratio of its memory peers.
The downgrade reflects a belief that the pure-play NAND business will likely trade at a significant discount compared to other memory peers, especially those with a major focus on Dynamic Random-Access Memory (DRAM), for two main reasons.
Firstly, the NAND industry is highly fragmented, and secondly, it is expected to benefit less from advancements in Generative AI technology. While improvements in NAND fundamentals are anticipated in the upcoming quarters, Raymond James sees a more attractive risk/reward profile in other companies like Micron (NASDAQ:MU), which they rate as Outperform.
For investors who are optimistic about the HDD market's recovery, Raymond James recommends considering shares of Marvell Technology Group (NASDAQ:MRVL), which the firm has also rated as Outperform. The guidance from Raymond James suggests a more cautious approach to Western Digital's stock, proposing that investors look to other opportunities within the sector for potentially better returns.
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