Western Digital: Hard Times Ahead – Barron’s

Shares of Western Digital (WDC) are in retreat today, falling after Deutsche Bank downgraded the chip maker’s stock from a Buy to a Hold, arguing that the drama playing out over Toshiba’s (6502.Japan/TOSYY) sale of it memory business to a consortium warrant “a more cautious view on the stock.”

How cautious? Deutsche’s Sherri Scribner cut her price target from $105 to $80, which suggests a 3% downside for the U.S.-listed shares.

Scribner had been bullish on the stock for the last few years due to cost cutting and the company’s move to diversify into the NAND flash drive market. But now, she argues that “cost cutting will take a back seat to the dynamics playing out in the NAND market.”

The well-publicized drama related to the sale of Toshiba’s memory business has created uncertainty around the WDC/Toshiba joint venture (JV) and the ongoing relationship between the two companies for NAND development. In addition, while NAND has been the driver of recent upside to results, we believe NAND market tightness will start to ease in 2018, suggesting we are nearing the peak in this NAND cycle. Given uncertainty around the Toshiba relationship and our view that the NAND market is nearing a peak, we would advise investors to take a more cautious, wait-and-see approach.

Shares of Western Digital are down 1.4% to $83.25 in recent market action.

Last month, Toshiba announced a $17.8 billion deal to sell its flash memory chip business to a consortium led by Bain Capital. Western Digital, which relies on joint ventures with Toshiba for its NAND chip supply, had been in talks with Toshiba regarding a possible bid, and is now pursuing arbitration.

A big worry about the sale is that the consortium includes Western Digital’s rival, Seagate Technology (STX).

A decision in the arbitration case is expected next year. Which side will prevail in the arbitration is hard to gauge, says Scribner. But she argues that Western Digital’s relationship with Toshiba has been damaged, and worries about the company’s future ability to procure NAND chips.

Meanwhile, NAND prices may be nearing a peak, Scribner says.

These dynamics suggest to us that WDC;s recent pattern of outperformance will likely near an end in the next one to two quarters and we see fewer opportunities for WDC to surprise to the upside as we move into C1H-18.

Not the first analysts to grow more cautious on Western Digital. Earlier this week, Baird’s Tristan Gerra lowered the stock to Neutral and cut his price target to $93, describing “nuclear fallout potential” for the chip maker.

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