Western Digital Shares Rally as Goldman Turns Bullish on NAND Memory Chip Demand
Western Digital shares were gaining ground Friday after Goldman Sachs analyst Toshiya Hari raised his rating on the disk-drive and flash memory storage company to Buy from Neutral and lifted his target price on the stock to $85, from $56.
As part of the same call, he also repeated his Buy rating on Micron Technology shares, lifting his price target to $118 from $102. At the heart of his thesis: indications of improving demand for both DRAM and NAND memory chips.
Micron (ticker: MU) generates about two-thirds of its business from DRAM. Western Digital (WDC), while continuing to be one of the two primary plays on disk drives, along with Seagate Technologies (STX), also has a substantial business in NAND flash memory products. Both Micron and Western Digital have rallied this year amid widespread reports of tight supplies and improving prices; Micron earlier this week raised its outlook for the fiscal quarter ended on Thursday. Hari’s call is that the dynamics in both DRAM and NAND will continue to improve.
On DRAM, he says, industry checks and recent increases in spot market pricing show an improving supply/demand dynamic. Feedback from enterprise customers is “mixed,” he wrote, but that demand from other end markets — PCs, smartphones, cloud, gaming, automotive and industrial — have “remained robust or have strengthened.”
He points out that spot market DRAM pricing has surged to a 48% premium over contract pricing, a clear sign of high demand and limited supply. And he notes that the industry has maintained supply discipline, with aggregate shipments from major makers of chip manufacturing equipment like Applied Materials (AMAT), Lam Research (LRCX), and Tokyo Electron (8035. Japan) to DRAM makers down 11% sequentially in the fourth quarter.
“While there is always potential for the spending outlook to change over a relatively short time span, note that it would take at least three to four quarters for any DRAM supplier to meaningfully impact supply given equipment lead times and manufacturing cycle times,” he wrote.
As for the NAND market, Hari says feedback on supply/demand from industry discussions was “universally positive, with participants pointing to an improving demand environment, particularly in the smartphone, PC, game console, and cloud end-markets.” Hari expects NAND pricing to show moderate declines in the first quarter, with flat pricing in the second quarter, and higher prices in the third and fourth quarters.
On Western Digital specifically, he offers multiple reasons for his more bullish stance: The call starts with the improved supply/demand balance in NAND, which accounts for just over half of the company’s revenue. He also notes that margins are improving in NAND.
On the disk-drive side of the business, he expects the company to recover some lost market share in the “nearline” storage market — drives that sit between longer-term offline storage and more immediate flash-based storage. Hari has high expectations for a new technology called “energy-assisted magnetic recording,” which increases the volume of data that can be stored on a given platter. “We expect the company to benefit from a recovery in the nearline market following a period of capacity digestion on the part of cloud customers, and Western Digital having completed the qualification process at multiple cloud titans,” he wrote.
Also, Hari liked the company’s aggressive push to reduce debt. He notes that Western is targeting gross debt of $6 billion and net debt of $3 billion, which would be down a little more than $3 billion from where the company exited calendar 2020. “We believe the reduction of debt on the balance sheet over time will not only be accretive to future EPS, but could also drive an expansion in the stock’s P/E multiple,” he wrote. And not least, he sees upside to Wall Street estimates, which he thinks have not fully reflected changing market conditions.
In Friday trading, Western Digital was up 3.5%, to $65.70, while Micron was up 1.6%, to $85.66.
Write to Eric J. Savitz at [email protected]