Western Digital Corporation (WDC) and Pure Storage, Inc. (PSTG) are two prominent tech companies engaged in data storage. WDC in San Jose, Calif., develops, manufactures, and sells data storage devices and solutions, mainly hard-disk drives (HDDs) and solid-state drives (SDDs), and serves OEMs, distributors, resellers, and retailers. In comparison, PSTG in Mountain View, Calif., provides technology and data storage solutions and offers container data services, such as storage, data protection, data security, and disaster recovery/backup for cloud-native applications. It also offers flash enterprise arrays for high-performance workloads.

Rising demand for high-capacity data storage solutions in the digital era has been driving the data storage industry’s growth. The continued adoption of hybrid working models should further drive the industry’s growth. The data storage market is expected to grow at a 32.3% CAGR to $4.20 billion by 2026. Therefore, PSTG and WDC should benefit substantially.

While WDC’s shares declined 10.1% in price over the past month, PSTG’s gained 9.5%. PSTG is also a clear winner with 10.9% gains versus WDC’s negative returns over the past six months. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

At its HDD Reimagine event on Aug. 31, 2021, WDC introduced a new flash-enhanced drive architecture that breaks traditional storage boundaries. The new storage architecture with OptiNAND technology optimizes and integrates HDDs with iNAND embedded flash drives. This solution allows customers to meet the exponential growth in data creation by delivering the capacity, performance, and reliability needed to store vast amounts of data.

On Feb. 10, 2022, PSTG announced a strategic engagement with Amazon.com, Inc.’s (AMZN) Amazon Web Services (AWS) company for solution development and enablement programs for PSTG’s Portworx solutions to help enterprises move Kubernetes workloads into production. Because organizations’ increased adoption of containerized applications demands more options to manage stateful and persistent data, Portwox offering could help build persistent storage, data protection, disaster recovery, cross-region and hybrid data migrations, and automated capacity management. PSTG should witness high demand in the coming months.

Recent Financial Results

WDC’s net revenue for its fiscal year 2022 second quarter, ended Dec. 31, 2021, increased 22.6% year-over-year to $4.83 billion. The company’s non-GAAP gross profit came in at $1.62 billion, indicating a 56.2% year-over-year improvement. Its non-GAAP operating income was  $882 million, up 157.1% from the prior-year period. And while its non-GAAP net income increased 241.5% year-over-year to $724 million, its non-GAAP EPS grew 233.3% to $2.30. As of Dec. 31, 2021, the company had $2.53 billion in cash and cash equivalents.

For its fiscal year 2022 fourth quarter, ended Feb. 6, 2022, PSTG’s total revenue increased 41% year-over-year to $708.57 million. The company’s non-GAAP gross profit came in at $487.54 million, representing a 39.7% rise from the prior-year period. Its non-GAAP operating income came in at $118.69 million, representing a 223.2% year-over-year rise. And PSTG’s non-GAAP net income was  $112.44 million, up 189.8% from the prior-year period. Its non-GAAP EPS was  $0.36, up 176.9% from the year-ago period. The company had $466.20 million in cash and cash equivalents as of Feb. 6, 2022.

Past and Expected Financial Performance

WDC’s revenue, total assets, and levered free cash flow have decreased at CAGRs of 0.8%, 2.3%, and 19.1%, respectively, over the past three years.

WDC’s EPS is expected to grow 89.8% year-over-year in its fiscal year 2022, ending June 30, 2022, and 21.8% in its fiscal 2023. Its revenue is expected to grow 19.5% year-over-year in its fiscal year 2022 and 10.6% in fiscal 2023. And analysts expect the company’s EPS to grow at a 20% rate per annum over the next five years.

In comparison, PSTG’s revenue, total assets, and levered free cash flow have increased at CAGRs of 17.1%, 16.7%, and 61.4%, respectively, over the past three years.

Analysts expect PSTG’s EPS to rise 28.9% year-over-year in its fiscal year 2022, ending Jan. 31, 2023, and 28.5% in its fiscal year 2023. Its revenue is expected to increase 19.4% year-over-year in fiscal 2022 and 16.2% in fiscal 2023. The company’s EPS is expected to grow at a 65.1% rate per annum over the next five years.

Valuation

In terms of non-GAAP forward PEG, PSTG is currently trading at 1.24x, which is 83.9% higher than WDC’s 0.20x. And in terms of forward EV/Sales, WDC’s 1.11x compares with PSTG’s 3.08x.

Profitability

WDC’s trailing-12-month revenue is almost 8.7 times PSTG’s. WDC is also more profitable, with a 17.8% EBITDA margin versus PSTG’s negative value.

Furthermore, WDC’s ROE, ROA, and ROTC of 18.3%, 5.8%, and 7.6% respectively, compare with PSTG’s negative values.

POWR Ratings

While WDC has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, PSTG has an overall C grade, which equates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

In terms of Growth, both WDC and PSTG are rated A. WDC’s levered free cash flow has grown 147% over the past year, while PSTG’s levered free cash flow has grown 89.4%.

WDC has a B grade for Value, which is in sync with its lower-than-industry valuation ratios. WDC has a 1.17x forward Price/Book, which is 72.8% higher than the 4.29x industry average. However, PSTG’s D grade for Value reflects its overvaluation. PSTG’s 9.13x forward Price/Book is 112.7% higher than the 4.29x industry average.

Among the 45 stocks in the B-rated Technology – Hardware industry, WDC is ranked #11.

PSTG is ranked #1 in the B-rated Technology – Storage industry.

Beyond what we have stated above, our POWR Ratings system has also rated WDC and PSTG for Stability, Sentiment, Momentum, and Quality. Get all WDC ratings here. Also, click here to see the additional POWR Ratings for PSTG.

The Winner

The rising demand for efficient and secure data storage and management platforms from enterprises should benefit WDC and PSTG. However, its higher profitability and lower valuation we think make WDC a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Technology – Hardware industry, and here for those in the Technology – Storage.

WDC shares were trading at $46.58 per share on Tuesday afternoon, down $0.03 (-0.06%). Year-to-date, WDC has declined -28.57%, versus a -11.19% rise in the benchmark S&P 500 index during the same period.

About the Author: Sweta Vijayan

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...

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