What Uncertainty Around Toshiba's Future Means For Western Digital

Deutsche Bank delved into the uncertainty regarding Western Digital Corp WDC's joint venture with Toshiba Corp (USA) TOSYY in a Wednesday note.

Citing the uncertainty and the dynamics playing out in the NAND market, the firm downgraded Western Digital from Buy to Hold and lowered its price target from $105 to $80.

At the time of writing, shares of Western Digital were down 1.15 percent at $83.38.

Toshiba has announced plans to move forward with a sale of its memory business, including its joint venture with Western Digital, to a consortium led by Bain Capital, said analyst Sherri Scribner. Western Digital has said it will "continue to fight for its rights" using arbitration, with a decision expected as soon as early 2018. (See Scribner's track record here.)

It's now clear the relationship between the companies is damaged, Scribner said. Given that Toshiba has limited access Western Digital employees' access to the joint venture sites and announced plans to build a new fab without Western Digital, Deutsche Bank sees risk to Western Digital's ability to procure NAND.

Until the questions concerning the uncertainty surrounding the joint venture and Western Digital's ability to procure NAND are resolved, the firm is projectnig that shares of Western Digital will trade at a discount to past multiples.

While noting that NAND has been the driver of recent upside to results, Scribner said it believes NAND market tightness will start to ease in 2018, suggesting the approach of the peak in the NAND cycle.

Against these backdrops, Deutsche Bank said investors should take a more cautious wait-and-see approach.

"Given the gross margin and EPS declines we expect in FY-19, and higher uncertainty, we believe a below-average multiple is more prudent at this time," Scribner said.

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