Shares of Western Digital (WDC) are on the rise after Deutsche Bank analyst Sidney Ho upgraded the stock to Buy as he is starting to see favorable data points in both hard disk drives and NAND memory that he believes should support a "solid" second half of the year recovery for the company’s earnings. This follows Longbow Research’s upgrade to Buy on Monday, with analyst Nikolay Todorov citing a "line of sight to cyclical recovery."
FAVORABLE DATA POINTS: In a research note to investors, Deutsche Bank's Ho upgraded Western Digital to Buy from Hold and raised his price target on the shares to $60 from $45. The analyst pointed out that he is starting to see favorable data points in both hard disk drives and NAND that will support a "solid" second half of the year recovery for Western Digital's earnings. While the company's near-term earnings have downside risk due to weaker than expected NAND pricing, supply cuts across the NAND industry, along with a reacceleration of HDD demand, will likely lead to a stronger recovery off a lower base in the first half of 2019, Ho contended. Additionally, he pointed out that he expects management to highlight improved visibility on the upcoming earnings call, which should be a positive catalyst for the shares. As such, Ho sees a favorable setup for Western Digital into the earnings print.
CYCLICAL RECOVERY: On Monday, Longbow Research's Todorov also upgraded Western Digital to Buy from Neutral, with a $65 price target. The analyst told investors in a research note of his own that he believes NAND fundamentals are bottoming and "there is a line of sight to cyclical recovery." Further, Todorov noted that industry NAND capex/production is likely to be further rationalized as industry profitability is under pressure, and argued that second half of 2019 hard drive revenue and gross margin recovery does not appear to be fully contemplated, creating an asymmetric risk/reward for the shares. Overall, the analyst sees limited downside and subsiding NAND inventory concerns as prices are normalizing, demand elasticity is showing up, and supply is further rationalized. Todorov added that he likes the odds of positive surprises given investor sentiment, which remains too bearish, tailwinds from early NAND production cuts, meaningfully improved NAND product portfolio and sales/gross margin upside driven by HDD hyperscale demand pick-up.
PRICE ACTION: In morning trading, shares of Western Digital have gained about 4.5% to $54.19.