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We came across a bullish thesis on Western Digital Corporation (NASDAQ:WDC) on ValueInvestorsClub by anonymous.user. In this article, we will summarize the bulls’ thesis on WDC. The company’s shares were trading at $48.42 when this thesis was published, vs. the closing price of $48.93 on Feb 28.
A technician configuring a network-attached storage drive.
WDC develops, manufactures, and sells data storage devices and solutions in the United States, China, Hong Kong, Europe, the Middle East, Africa, the rest of Asia, and internationally. 50% of its revenue comes from the sale of hard disk drives (HDD), a cheap and widely used storage option that finds its application in cloud architecture by hyperscalers. The other 50% of revenue is contributed by NAND/flash devices that are faster but more expensive.
WDC is definitely going to be a beneficiary of the AI boom since these models require extensive storage capabilities. As AI models become more complex, the demand for storage should compound at a faster rate. In the initial stage, the demand for HDD should ramp up due to its lower cost profile. Though NAND is 5x costlier, its speed has driven demand enabling WDC to drive 15-20% of NAND sales to data centers, up from 10%. WDC has managed to secure contracts with Tesla and Nvidia, with Amazon and Microsoft in the pipeline.
The business cycle for both its segments also points to a more optimistic future. The down-cycle is expected to last only 2-3 quarters as manufacturers like Samsung and Micron look to cut capacity. While AI demand will be critical in reviving demand, there are other drivers that include Windows 10 lapsing in 2025, a required upgrade in electronic devices purchased during Covid and Microsoft’s cloud offering that favors NAND. The HDD industry has developed into a duopoly that would enable WDC to expand margins as demand from hyperscalers surges.
The valuation of the HDD segment can be done using high single-digit to low double-digit growth in 2026, leading to an EBITDA of $2.9 billion for this segment. Assuming a 10x EBITDA multiple, the intrinsic value of the HDD part is $75. For the NAND business, a 15% growth can be applied in 2026 after WDC emerges from the down-cycle. With a revenue of $85 billion and a multiple of 1x, this segment generates a value of $25/share. The combined value of $100 offers a 100% return from its current share price.
While we acknowledge the potential of WDC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than WDC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.