Western Digital Corporation (WDC) in San Jose, Calif., develops, manufactures, and sells data storage devices and solutions. It offers client devices, including hard disk drives and solid-state drives for computing devices. It also provides data center devices and solutions, comprising enterprise helium hard drives and enterprise SSDs. In comparison, NetApp, Inc. (NTAP) in San Jose, Calif., provides software, systems, and cloud services to manage and share data on-premises and in private and public clouds worldwide. It provides cloud storage services, cloud control solutions, analytics, and cloud optimization solutions.
Even though the supply chain crisis and the semiconductor chip shortage exacerbated by the Russia-Ukraine war are harnessing the computer hardware industry’s growth, demand has been increasing, with companies rearranging their operations to make hybrid working a permanent feature. Furthermore, amid rapid digital transformation, the adoption of advanced technologies, such as the internet of things (IoT), artificial intelligence (AI), and cloud-based computing is expected to rise, driving an increasing need for computer hardware. According to Globe Newswire, the global computer hardware market is expected to grow at a 6% CAGR through 2025. Therefore, both WDC and NTAP should benefit.
WDC has gained 0.4% in price over the past month, while NTAP has delivered negative returns. However, NTAP’s 0.6% gains over the past year compare with WDC’s negative returns.
But which of these two stocks is a better buy now? Let’s find out.
On April 14, 2022, WDC and Kioxia Corporation finalized a formal agreement to jointly invest in the first phase of the Fab7 manufacturing facility at Kioxia’s industry-leading Yokkaichi Plant in the Mie Prefecture of Japan. Dr. Siva Sivaram, President, Technology & Strategy, WDC, said, “Our strategic partnership with Kioxia has led to the introduction of leading-edge technology while increasing the scale of manufacturing and R&D capabilities. We look forward to continuing to drive long-term success together.”
On April 07, 2022, NTAP announced that it had signed a definitive agreement to acquire Instaclustr. George Kurian, CEO at NTAP, said, “The acquisition of Instaclustr will combine NetApp’s established leadership in continuous storage and compute optimization with Instaclustr’s fully-managed database and data pipeline services to give customers a Cloud Operations platform that provides the best and most optimized foundation for their applications in the public clouds and on premises.”
Recent Financial Results
WDC’s net revenue increased 23% year-over-year to $4.83 billion for the fiscal second quarter ended December 31, 2021. The company’s operating income grew 360% year-over-year to $727 million, while its net income came in at $564 million, representing an 810% year-over-year increase. Also, its EPS came in at $1.79, up 795% year-over-year.
NTAP’s revenues increased 9.5% year-over-year to $1.61 billion for the fiscal third quarter ended January 28, 2022. The company’s income from operations grew 24.4% year-over-year to $321 million, while its non-GAAP net income came in at $330 million, representing a 32% year-over-year increase. Also, its non-GAAP EPS came in at $1.44, up 30.9% year-over-year.
Past and Expected Financial Performance
WDC’s EPS grew at a CAGR of 32.4% over the past three years. Analysts expect WDC’s revenue to increase 19.6% in fiscal 2022 and 9.7% in fiscal 2023. The company’s EPS is expected to grow 90.6% in fiscal 2022 and 20.1% in fiscal 2023. Moreover, its EPS is expected to grow at a rate of 20% per annum over the next five years.
On the other hand, NTAP’s EPS grew at a CAGR of 4.1% over the past three years. The company’s revenue is expected to increase 10.1% in fiscal 2022 and 7.3% in fiscal 2023. Its EPS is expected to grow 26.6% in fiscal 2022 and 6.2% in fiscal 2023. Also, NTAP’s EPS is expected to grow at a rate of 8.8% per annum over the next five years.
WDC’s trailing-12-month revenue is 3.06 times what NTAP generates. However, NTAP is more profitable, with a gross profit margin and net income margin of 67.27% and 16.34% compared to WDC’s 30.73% and 10.52%, respectively.
Furthermore, NTAP’s ROE, ROA, and ROTC of 148.82%, 8.26%, and 21.25% are higher than WDC’s 18.25%, 5.75%, and 7.59%, respectively.
In terms of forward non-GAAP P/E, NTAP is currently trading at 15.05x, 134.8% higher than WDC’s 6.41x. Moreover, NTAP’s forward EV/EBITDA ratio of 9.44x is 93.8% higher than WDC’s 4.87x.
So, WDC is relatively affordable here.
WDC has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, NTAP has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
WDC has an A grade for Growth, consistent with analysts’ expectations that its EPS and revenue will increase significantly in the upcoming months. On the other hand, NTAP has a C grade for Growth, in sync with analysts’ expectations that its EPS and revenue will grow moderately in the near term.
Also, WDC has a B grade for Value, consistent with its forward P/B of 1.28x, 70.7% lower than the industry average of 4.37x. However, NTAP has a C grade for Value, in sync with its forward P/B of 20.08x, 359.7% higher than the industry average of 4.37x.
Of the 44 stocks in the Technology – Hardware industry, WDC is ranked #13. In comparison, NTAP is ranked #16.
The computer hardware industry is expected to grow exponentially as the industry participants help facilitate the hybrid working trends. While WDC and NTAP are expected to gain, it is better to bet on WDC now because of its robust financials, lower valuation, and better growth prospects.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Technology – Hardware industry here.
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WDC shares were trading at $49.67 per share on Tuesday afternoon, down $1.34 (-2.63%). Year-to-date, WDC has declined -23.83%, versus a -11.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...
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