Western Digital Gross Margins Vulnerable To Pricing, Minimal Cost-Down, Analyst Says

Mizuho analyst Vijay Rakesh maintained Western Digital Corp WDC with a Neutral and lowered the price target from $38 to $35. WDC reported in-line December quarter.
Cloud (~39% of revenue) was down 33% Q/Q, with softer capacity enterprise drives, while Client and Consumer segments were down 11%/ up 17% Q/Q, respectively, with weaker flash pricing. However, consumers saw an uptick in HDD and flash volumes but also saw challenging Y/Y pricing.
WDC inventory was down 2% Q/Q and up 3% Y/Y.
WDC guided March quarter revenue below consensus, with the gross margin down further to ~10% (consensus ~20.0%), reflecting a modest Q/Q rebound in HDD with nearline but significant declines in NAND, with WDC cutting NAND Capex.
Underutilization at PC and Cloud challenged NAND (53% of revenue).
HDD (47% of revenue) bottomed in the December quarter (down 34% Y/Y) with possible recovery in the March quarter. WDC noted reductions in capacity and production line idling to offset demand softness.
WDC is lowering Gross Capex expectations to $2.3B and Cash Capex spending to $900M due to underutilization.
WDC noted March quarter gross margins expected to be ~10%, down ~700bps Q/Q with $250M in underutilization charges (~75% NAND/25% HDD), as it expects NAND gross margins to be negative, and the analyst saw the potential for further challenges into the June quarter from pricing pressure and minimal cost-downs.
WDC maneuvered a challenging NAND environment with an aggressive Samsung Electronics Co, Ltd SSNLF driving NAND supply.
Near-term, the analyst lowered March quarter estimates.
WDC faces NAND GM headwinds with underutilization and oversupply, though new strategic options expected could provide upside to shares.
Price Action: WDC shares traded lower by 3.48% at $42.43 on the last check Wednesday.

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