Western Digital stock has embarked on a major bull run this year, reaching its highest point on record on June 18. It has soared by 264% this year and 960% in the last 12 months, bringing its market capitalization to over $221 billion. While this rally may continue after the Micron earnings, WDC faces some major risks that may drive it lower over time.
Western Digital stock has jumped amid rising AI demand
WDC is a top manufacturer of internal and external hard drives and data center storage solutions. Its products are used by some of the biggest hyperscalers in the world, like Amazon, Microsoft, Google, and Meta. They are also used by computer manufacturers like Dell, HP, and Lenovo.
The ongoing WDC share price surge is because of its exposure in the growing data center industry, where vast amounts of data are being created each day. This growth has led to a surge in demand and a shortage, pushing hyperscalers to enter into long-term contracts.
Western Digital’s business has continued growing this year, and analysts are predicting robust double digit growth in the foreseeable future. The most recent results showed that its revenue jumped by 45% YoY to $3.34 billion, while its gross margin expanded to 50.2%. In his statement, the CEO said:
“The demand drivers are clear: Virtually every AI workload, from training, inference, agentic AI to physical AI, creates data that is stored persistently and cost-efficiently on HDDs.”
Wall Street analysts tracking the company are optimistic that the growth will continue this year. The average estimate is that this quarter’s revenue (Q4) will grow by 42% to $3.69 billion. If this happens, it will bring the annual revenue to $12.87 billion, up by 35% YoY. The next annual revenue will jump by 38% to $17.7 billion.
Wall Street analysts are bullish on WDC shares
Most analysts tracking the company have a favorable outlook for it. Morgan Stanley’s analysts boosted the target from $488 to $650, while JPMorgan also hiked to the same target. Mizuho and Citigroup hiked to $685, while Barclays increased the target to $620. Morgan Stanley also boosted its outlook to $650.
Still, the company faces some major challenges ahead. For example, its business is usually cyclical, experiencing periods of boom and bust. This happens because soaring prices normally push prices higher, pushing companies to boost production.
READ MORE: Western Digital, Seagate, Sandisk stocks are bracing for a major Micron event
The other risk is that the company has become more overvalued than its faster-growing peers like Micron and Sandisk. It has a forward price-to-earnings ratio of 67, higher than Sandisk’s 30, and Micron’s 17. The multiple is also higher than the S&P 500 Index’s average of 22.
At the same time, there is a risk that the ongoing data center cancellations in the US will affect the growth.
Technicals suggest that the Western Digital stock price may drop further
WDC stock chart | Source: TradingView
The daily chart shows that the WDC stock price has slumped in the past few days, moving from a high of $800 to a low of $613 on Wednesday. It then bounced back to $730 after the Micron earnings.
A major risk is that the stock remains much higher than the 200-day moving average of $317. This means that the stock may go through a mean-reversion, where an asset drops to align with its historical averages.
The stock has also formed a bearish divergence as the Relative Strength Index (RSI) has formed a descending channel. Therefore, there is a risk that the stock will drop further to the key support of $500 in the near term.
READ MORE:Western Digital stock looks ripe for a near-term pullback: find out more
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