Western Digital Delivers Across The Board Beat; How Is It Better Than Seagate?

Western Digital Corp (NASDAQ: WDC) is reaping the rewards of its SanDisk acquisition that not only helped the storage company deliver a blow-out quarter and solid guidance, but also keeps it a touch ahead of rival Seagate Technology PLC (NASDAQ: STX).

Western Digital has acquired SanDisk in May 2016 to strengthen its NAND flash technology, which is cost-effective and fast replacing the traditional magnetic storage system. In fact, the strong growth in flash products is offsetting declines in HDD business.

Further, the company benefited from the shift to cloud storage products as more businesses are transitioning toward the cloud.

Quarterly Results

Buoyed by favorable NAND pricing, Western Digital reported better-than-expected quarterly revenue and EPS. Gross margin of 36.7 percent also beat expectations.

Western Digital expects March quarter revenues of $4.6 billion, higher than the Street’s $4.4 billion. The EPS guidance of $2.00–$2.10 also came in much higher than consensus estimate of $1.69. Gross margin guidance of 38 percent also topped expectations on upbeat pricing trends.

Comparison To Seagate

Rival, Seagate too reported better-than-expected EPS with solid margins, and raised its revenue forecast for the current quarter amid strong demand for cloud-based storage products.

But, Western Digital’s exposure to flash could act as a differentiator between the two companies as its timely acquisition of SanDisk helped it to offset the secular declines in magnetic storage.

“Unlike competitor STX (Seagate), which is also showing meaningful gross margin expansion, we believe WDC’s exposure to flash cushions the company nicely against the headwinds facing magnetic storage,” BMO analyst Tim Long wrote in a note.

Further Justification For Favoring Western Digital

Western Digital expects flash demand to remain high in a supply-constrained environment and analyst Long estimates that roughly 42 percent of revenues will come from flash in FY 2017. The analyst recalled that solid-state drives represented just 7 percent of revenue in the 12 months before the SanDisk acquisition.

“We continue to believe that Western Digital is catching up on 3D NAND, and we believe the constrained flash capacity environment, coupled with WDC’s strong customer relationships, should continue to spur growth in FY2017 and beyond,” Long added.

Long, who has an Outperform rating on Western Digital shares, raised his price target on the shares to $104 from $90.

At last check, shares of Western Digital were almost flat at $80, while Seagate shares rose 2.65 percent to $43.80.

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