Western Digital beats Q4 but stock falls 20% on margin gap

Western Digital Corp. reported fiscal fourth-quarter revenue of $3.75 billion, up 44% year over year and above the $3.65 billion it projected in April, yet shares fell about 20% this week to near $434 as its margin outlook trailed rival Seagate Technology.

"Data creation isn't slowing, it's accelerating," Chief Executive Officer Irving Tan said, as the company ramps 40-terabyte ePMR drives and prepares 44-terabyte HAMR products for the first half of 2027.

Adjusted EPS came in at $3.56, gross margin reached 54.4%, and free cash flow totaled $1.3 billion. Management guided fiscal first-quarter revenue to about $4.1 billion, gross margin of 55% to 56%, and EPS of about $4.00. Western Digital shipped 231 exabytes in the quarter, up 22%, while cloud revenue reached $3.3 billion, or 89% of sales, up 43% year over year.

The selloff reflects an expectations reset rather than a breakdown in storage demand. Analysts on the earnings call flagged that WDC's margin outlook ran roughly 200 basis points below Seagate, which is targeting gross margins above 57%. Summit Insights downgraded the stock from Buy to Hold after the results, adding to concerns that the storage recovery is already well advanced.

Valuation Case Hinges on Capacity Ramp

The next leg higher depends on whether Western Digital can convert stronger pricing and higher-capacity drives into faster earnings growth. Management expects the 40TB ePMR platform to represent more than 50% of nearline exabytes by fiscal Q3 2027, while contract repricing and long-term customer agreements extending into 2031 provide additional pricing power.

Under a bullish scenario of 32% revenue growth, 40% operating margins, and a 17x exit P/E, TIKR's model estimates a target price of about $650, implying roughly 50% upside from current levels. The 17x multiple is restrained against the stock's five-year historical average near 21x, meaning the case rests on earnings delivery rather than multiple expansion.

Western Digital ended the quarter with $1.6 billion in cash, $1.1 billion in debt, and a $500 million net cash position, after returning $1 billion in buybacks and $54 million in dividends. The stock has gained 477% over the past year, far outpacing the Zacks Computer-Storage Devices industry's 346% rise and the S&P 500's 22.7% gain.

The guidance raise signals management expects AI-driven storage demand to keep accelerating. Investors will watch the fiscal first-quarter report for evidence that 40TB ePMR ramp and contract repricing translate into margins closing the gap with Seagate.

This article is for informational purposes only and does not constitute investment advice.