Shares of Western Digital (WDC) are on the rise after Loop Capital analyst Ananda Baruah upgraded the stock to Buy, citing his findings that flash memory average selling prices are set to increase, and sustain their increases, beginning in the September and December quarters.
BUY WESTERN DIGITAL: In a research note to investors, Loop Capital’s Baruah upgraded Western Digital to Buy from Hold and raised his price target on the shares to $75 from $50. The analyst said that for the first time, his work suggests flash ASPs can begin to increase in the September and December quarters, possibly sustaining those increases in calendar 2020. Further, Baruah believes Western Digital can embark on a path to at least $7.50 in normalized earnings per share in calendar 2021.
His work suggests that ASPs for mainstream client capacity points began to increase mid-August/early September and now appear sustainable through the December quarter. Moreover, his work suggests ASP levels are sustainable entering calendar 2020. The analyst believes catalysts include slightly firmer than anticipated Apple (AAPL) iPhone 11 demand and flash industry inventory management, which is at least as anticipated.
Baruah believes Flash gross margin could reach 25%-plus in the December quarter and if his calendar 2020 ASP assumptions prove accurate, it could approach 35%, which has historically been the lower end of the "sweet spot" for Western Digital flash gross margin during times of stable economics. The analyst is also looking for about 13M Cloud HDDs for the September quarter and 14M-15M for the December quarter, which he views as "solid" given the current macro backdrop. Additionally, pricing dynamics may be turning net-stable, Baruah added, arguing that this could mean stabilizing Cloud HDD pricing that could prove beneficial the next three to four quarters.
WHAT'S NOTABLE: Earlier this month, RBC Capital analyst Mitch Steves said that he sees Western Digital benefiting from a better than feared NAND cycle. The analyst pointed out that the recent reduction of the operating margin target by Seagate (STX) at its analyst day suggested that NAND memory is replacing HDDs in high storage environment. He contended that as costs per terabyte on flash arrays comes down, Western Digital stands to benefit from the NAND pricing trends. Further, Steves is positive on the latter’s ability to "accelerate and further improve capital allocation" as well as expand its leadership in enterprise drives. The analyst reiterated an Outperform rating and $65 price target on Western Digital’s shares.
PRICE ACTION: In morning trading, shares of Western Digital have gained about 1.5% to $59.19.