Western Digital Corp., which is considering a breakup of its hard disk drive and flash businesses, is also wrestling with a tough macroeconomic environment.
On Friday Western Digital Corp.
reported lower fourth-quarter sales and profit compared with the same period last year, impacted by a drop in its hard disk drive business. Set against this backdrop, Western Digital’s sales and adjusted earnings guidance came in below analysts’ expectations.
Western Digital’s shares rallied 1.9% Monday, after closing down 5.7% at $47.09 on Friday. The stock has fallen 26.4% this year, compared to the S&P 500 index’s 12.2% decline.
Earlier this year Western Digital said it would consider a breakup as part of a settlement with activist investor Elliott Management Corp. In June the company said it is reviewing potential strategic alternatives that include separating its flash and hard disk drive businesses.
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Before Western Digital’s fourth-quarter results came out, Stifel said that headwinds could accelerate the business breakup, which the investment bank and financial services company views as a positive. Stifel mentioned this again in a note released following its results, adding that the company’s outlook was more depressed than it had forecast. “In both HDD and flash, the problems are primarily in the Client and Consumer segments, and we think it will take a few quarters before a correction is complete,” wrote Stifel analyst Patrick Ho.
Stifel lowered its Western Digital price target to $70 from $77 but maintained its buy rating.
During a conference call to discuss the fourth-quarter results Western Digital Chief Executive David Goeckeler said the company would not be answering any questions on its strategic review, citing the “ongoing nature and confidentiality” of the process. Western Digital will provide updates in the future, “as appropriate,” he added.
In a note released on Friday Mizuho Securities highlighted headwinds around NAND flash, adding that a breakup of the company would be a positive. “Despite SIGNIFICANT idiosyncratic NAND headwinds, we believe there is potential to unlock value via an activist shareholder and NAND separation,” wrote Mizuho Securities analyst Vijay Rakesh.
Mizuho lowered its Western Digital stock price target to $62 from $68 but maintained its buy rating.
“A sharp inventory correction is underway in the client segment impacting both HDDs and flash,” wrote Benchmark analyst Mark Miller, in a note released on Monday. “Coupled with softening macro conditions, we believe the inventory reset will take a couple of quarters.” Benchmark sees a “somewhat limited” downside for Western Digital shares from the current level, and lowered its recommendation to hold from buy.
Citing intensifying consumer weakness, UBS also lowered its Western Digital price target to $50 from $55 and maintained its neutral rating.