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Why BMO Capital Markets Downgraded Western Digital

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Oct. 11 2020, Updated 12:34 p.m. ET

BMO Capital lowered 12-month price target to $85

A few days back, BMO Capital Markets analyst Tim Long downgraded the rating on Western Digital (WDC) stock to “market perform” from “outperform.” Long expects WDC stock to be range-bound in the short term and lowered the 12-month price target on the stock to $85 from $120. WDC is currently trading at $80.62.

Although Long believes the fundamentals of WDC stock to be solid, a flash storage demand-supply balance is expected to limit the potential improvement in profit margins and revenue growth for the firm. Analysts have estimated a YoY (year-over-year) rise in WDC’s shipments for 2018 driven by strong demand and increased capacity. However, Long is expecting a fall in average selling prices (or ASP), which could negatively impact gross margins and revenue in 2019.

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Long stated, “Given the cyclical nature of the memory industry, we believe valuation will remain depressed on the expected slower growth and lower gross margins.” BMO Capital has projected a 7% YoY decline for HDD (hard disk drive) shipments in 2019. HDD accounts for approximately 50% of total revenue for WDC.

Bank of America reiterates buy rating on the stock

Bank of America (BAC) Merrill Lynch analyst Wamsi Mohan reiterated a buy rating in WDC with a 12-month price target of $120. Mohan is optimistic that the joint venture between Japan’s (EWJ) Toshiba and WDC will reduce supply uncertainty, and investments in a new fab will benefit the latter in the long run.

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