NAND Headwinds Are Behind RBC's 'No-Drama Downgrade' Of Western Digital

The bullish case for Western Digital Corp WDC is no longer warranted due to four near-term concerns, according to RBC Capital Markets.

The Analyst

Analyst Amit Daryanani downgraded Western Digital from Outperform to Sector Perform with a price target lowered from $95 to $70.

The Thesis

A "no-drama downgrade" of Western Digital is justified by four challenges that will impact the company in the near-term, Daryanani said in a Tuesday note. (See the analyst's track record here.)

They are:

NAND prices are likely to continue falling in the near-term in both the client and enterprise markets while total wafer starts simultaneously move higher, the analyst said. Total demand for NAND is likely to be muted over the next few quarters due to less-than-encouraging global smartphone trends, he said.
Western Digital faces ongoing margin concerns, as expectations for cost-per-bit declines will be "more muted" as the industry as a whole shifts toward 96-layer 3-D NAND, Daryanani said.
NAND providers are committed to ramping their capacity along with maintaining share and simultaneously maximizing profits, according to RBC. This dynamic could hinder Western Digital's efforts to scale back wafer adds to stabilize pricing and maintain its existing market share.
Finally, Western Digital's near-term woes aren't fully reflected in The Street's estimates, which call for a fiscal 2019 EPS of $11.71 and revenue of $20.4 billion, Daryanani said. Downside risk to estimates is in play moving forward, and RBC's models are below consensus estimates for fiscal 2019 at $9.99 per share and $19.66 billion, he said.