WDC - Western Digital rises even as Morgan Stanley cuts estimates for 5th time in 5 months

Western Digital ( WDC ) shares rose on Tuesday even as investment firm Morgan Stanley lowered estimates for the fifth time in five months and third time this quarter as volume and price declines for the NAND business are "much worse" than 2019.

Analyst Joseph Moore now expects 2022 earnings per share to be $3.23, down from a prior outlook of $3.52, while non-GAAP gross margins are expected to be 28.1%, down from 28.9%. Looking into 2023, Moore expects Western Digital ( WDC ) to lose $1.48 per share, compared to a prior view of a gain of 78 cents, with adjusted gross margins around 19.6%.

"NAND price and volume declines are severe, much worse than 2019, and financials will reflect that," Moore wrote in a note to clients. "With prices down 30%+ in all NAND markets between the June and December quarter, offset somewhat by yen-based cost declines of 10% of so, gross margins in December should be sub 15% (vs. 36% in second-quarter), and we see no relief in sight."

Moore added that the hard disk drive market is "unlikely to provide relief," citing the challenging economic conditions.

Western Digital ( WDC ) shares gained 1.8% in premarket trading.

Moore also said that in order for there to be a reversal, there needs to be a "combination of demand improvement and elasticity," but with demand staying weak in all markets, especially the PC and smartphone markets, it's unlikely to rebound anytime soon.

Despite the negativity surrounding Western Digital ( WDC ) and the broader NAND market, Moore remains overweight on the stock as the hard disk drive business trades at a 10% discount to peers on an enterprise value-to-sales basis, implying that the memory business is worth less than $3B.

"With back of the envelope math, NAND capital spending globally for the industry in the last 6 years has been $142B," Moore wrote, adding that the company's 15% market share should be worth roughly $20B. Even with book value lower as a result of a joint venture with Japan, the analyst posited that "the memory business is still less than 25% of replacement value."

The analyst also pointed out there are reasons to be optimistic around the next cycle. One of the main reasons is the fact that China's Yangtze Memory Technologies, which has added supply and lowered prices to undercut competitors, has been added to the restriction list by the Biden Administration, which should firm up the market.

Moore also noted that Western Digital ( WDC ) is still undergoing the strategic review of its business to separate its hard disk drive and memory business, which could increase shareholder value if it comes to fruition.

Late last month, Benchmark cut estimates for Western Digital's ( WDC ) fiscal 2023 on worries over a deterioration in business conditions, rising inventories and lower NAND pricing .

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