Morningstar | Western Digital should continue to benefit from data proliferation; shares remain fairly valued.
Western Digital is the leader of the hard disk drive, or HDD, market. In recent years, the firm has sought to expand into solid-state drives, or SSDs, to broaden its data-storage offerings. SSDs are faster and more reliable than HDDs, and have been replacing HDDs across PCs and servers. Although HDDs continue to boast superior cost metrics and higher capacities, SSDs have been closing these gaps. In 2016, Western Digital acquired SanDisk, a major supplier of NAND flash memory used in SSDs. We view this move as shrewd, as it enabled Western Digital to vertically integrate with its own captive channel of NAND.Nevertheless, we see significant secular headwinds for Western Digital’s traditional HDD demand in PCs, stemming from an ongoing decline in annual PC unit sales and shift to SSDs. Also, the SSD space is considerably more competitive than the HDD market. Worth noting is that SanDisk was a no-moat business because of the highly cyclical nature of the memory space further hindered by high capital intensity. We remain skeptical that Western Digital will generate sustainable excess returns on invested capital, leading to our no-moat rating.HDDs remain prominent in data centers to fulfill the high-capacity storage needs of hyperscale cloud vendors and other enterprises generating large swaths of data. The acceleration of cloud deployments should benefit Western Digital, so long as it is able to keep driving capacities higher and costs lower. SSDs are also encroaching on HDD territory in servers, though, and thus will likely aid in Western Digital’s ability to curb overall HDD declines.Through the firm’s SanDisk acquisition, Western Digital has a joint venture (Flash Ventures) with Toshiba to collaborate in the development and manufacturing of NAND flash memory wafers. Due to financial troubles faced by Toshiba, it is in the process of selling its semiconductor unit to a consortium that does not include Western Digital. Although there have been some concerns regarding this arrangement, we do not anticipate any negative ramifications for Western Digital at this juncture.Western Digital is a developer, manufacturer, and provider of data storage devices and solutions. The company's portfolio of technology and products address the following markets: Client Devices, which consist of hard disk drives (HDDs) and solid state drives (SSDs) for computing devices, flash-based embedded storage products, and flash-based memory wafers and components; Data Center Devices and Solutions, which consist of enterprise HDDs and enterprise SSDs, data center software and system solutions; and Client Solutions, which consist of HDDs and SSDs embedded into external storage products and removable flash-based products, such as cards, universal serial bus flash drives and wireless drives.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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