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Investment Thesis
Western Digital (NASDAQ:WDC) is a multinational corporation that designs, produces, and distributes data storage products and services. With a weekly fluctuation rate of 6.8% compared to the industry’s 7.2% during the last three months, the company’s share price volatility has been comparatively lower than the industry’s.
The company’s stock has underperformed the market by nearly 11% over the past year, falling by about 20%. These awful outcomes are, in my opinion, a direct result of the company’s bad financial performance, particularly its dismal profitability. While these are undoubtedly disappointing outcomes, the organization is undergoing a transformation period during which many promising initiatives have been established. Now, the company’s efforts to become profitable are concentrated on improving efficiency and maximizing available resources.
In addition, their partnership with Apollo Global Management, Inc. (Apollo) seems to be a big boon to the company’s long-term prosperity. I think this cooperation is appropriate for the company because the long-term outlook for the global industry is auspicious. Based on the aforementioned growth driver, I have an optimistic outlook on this firm.
Industry Outlook
Technavio estimates that the global market for computer accessories will grow by USD 4,616.8 million between 2022 and 2027. For the duration of the forecast, the market is expected to expand at a CAGR of 5.86%. In addition, the rate of expansion will quicken. In 2022, North America was responsible for the highest portion of the worldwide market, which is expected to grow by 51%.
E-sports’ meteoric rise is one of the primary forces fueling the expansion of the worldwide market for computer peripherals. Launching e-sports leagues has wholly altered the video game industry. The original goal of the e-sports league was to make competitive video gaming more interesting as a spectator sport worldwide. By the year 2020, e-sports had earned a total of $266.5M. The popularity of e-sports will increase the need for PC gaming peripherals. There are around 2.2 billion players worldwide, expected to rise during the projection period. Other than sports, factors like the increasing digitalization of the educational system also contribute to this expansion.
The Apollo Agreement: Company and Share Growth Catalyst
During the company’s Q2 2023 earnings call, the CEO disclosed that an investment agreement had been reached with Apollo.
David Goeckeler,” First, we disclosed that Western Digital has entered into agreements with Apollo Global Management and Elliott Investment Management for convertible preferred equity investments totaling $900 million.”
Western Digital’s involvement in the deal improves the company’s financial standing and flexibility as it continues to assess strategic alternatives to maximize long-term value for its shareholders. The terms of this agreement provide that shares will be purchased at a premium, further boosting the company’s share prices and giving funds to accelerate its growth.
Subject to standard anti-dilution and other adjustments, the initial conversion price of the preferred stock is $47.75 per share of Western Digital’s stock. The initial conversion price of $47.75 is a 44% premium over the closing price on January 4, 2023, the last trading day before merger rumors involving Western Digital began, and a 25% premium over the volume-weighted average closing price of the common stock over the 20 days ending on January 30, 2023.
Efficiency And Resource Optimization
During the company’s Q2 2023 earnings call, WDC management announced the adoption of actions to ensure efficiency and optimal resource use in response to the company’s bad financial results, particularly its negative profit metrics.
First, the firm has decreased capital expenditures in both Flash and HDD in an effort to control supply. In light of this development, it has reduced its expected cash capital expenditure for fiscal 2023 by roughly 40% over the previous six months. Furthermore, they have slowed the expansion of the Flash and HDD supply bids. January saw a 30% decrease in wafer starts for Flash.
In addition, they have slashed their quarterly non-GAAP operating expenses by more than $100 million since the end of the fiscal year 2022 due to a reduction in workforce, discretionary spending, and variable compensation. They aim to cut quarterly non-GAAP operating expenses to less than $600 million by the end of this fiscal year.
The Company’s Future Potential
The company’s performance is anticipated to improve in the years to come due to the ongoing initiatives, with Wall Street anticipating the company would become profitable in three years. Over the next three years, Wall Street estimates that the company’s earnings will rise at an annual growth rate of 99%, significantly outpacing the industry’s pace of 7.6%. In addition, over the following three years, its revenue is forecast to grow at 12.8%, far outpacing the industry average of 6.6%.
Following this strong growth potential, by 2025, the company is expected to have $17.7B in revenues, $1.7B in earnings, $1.2B in free cash flow, and $2.5B in cash flow from operations, which, in my view is a very strong position to be in. Further, its EPS is projected to hit $5.026 by 2025.
Wall Street
Risks
The debt issue at WDC is the primary concern for investors. It has a high net debt-to-equity ratio (42.90%) and inadequate operating cash flow coverage (10.40%). Investors should maintain a close eye on the situation, but I think it will improve because the company has been paying down its debt. Its financial position is expected to improve in the following years.
Conclusion
After a disastrous 2022, WDC appears to be in excellent shape to make a comeback. One of the many plans the business has to turn things around is an arrangement with Apollo that will bring financial synergies to WDC for development and boost share values.
The organization is now better positioned to capitalize on the market’s bright future. For this reason, its long-term prospects are solid and attractive. The Apollo transaction will immediately impact the company’s stock price, so I recommend buying the stock if you’re a value investor. The company is undergoing a complete reset; nonetheless, I recommend holding shares if you are profit-oriented because it is expected to turn profitable in three years.
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