By Sam Boughedda
A Deutsche Bank analyst downgraded shares of Western Digital (NASDAQ:WDC) to Hold from Buy, lowering the price target to $40 from $56 in a note on Tuesday, stating the "recovery path remains uncertain."
The firm believes Western Digital's F1Q (Sep) revenue and EPS are tracking below the low end of guidance, and its F2Q (Dec) outlook is also likely to be "meaningfully below current Street estimates."
"Demand has deteriorated throughout the current quarter with MU and STX already revised their outlook, but our recent industry checks suggest inventory adjustments and Flash ASP erosion will likely continue at least for the next two quarters, and we note that demand is seasonally weak in 1H CY23," explained the analyst.
Deutsche Bank feels it is possible that, over the next few quarters, Western Digital will re-test the trough margin (OPM of ~4%) and EPS ($0.17) reached in 2Q CY19.
"Of particular concern to us is that WDC now expects its free cash flow to be negative in FY23 (ending June 2023). While we do not see significant downside to the current share price given the stock is trading at ~1.0x EV/Sales, we also struggle to see any meaningful upside in the next 6-9 months as oversupply in the flash memory market persists and macro concerns intensify," the analyst added.
As a result, Deutsche Bank recommends investors move to the sidelines until there is better visibility into when the supply-demand balance returns.