Western Digital Corporation (WDC) in San Jose, Calif., and Dublin, Ireland-based Seagate Technology Holdings plc (STX) are two prominent players in the computer hardware industry. WDC develops, manufactures, and sells data storage devices and solutions, mainly hard-disk drives (HDDs) and solid-state drives (SDDs), and serves original equipment manufacturers (OEMs), distributors, resellers, and retailers worldwide. In comparison, STX develops, produces, and distributes data storage products and electronic data storage solutions. It also provides storage subsystems and mass capacity-optimized private cloud storage solutions for enterprises, cloud service providers, and scale-out storage servers and OEMs.

Because remote working is expected to continue with the impact of the now rampant COVID-19 Delta variant, organizations are increasingly adopting hybrid working models as a long-term solution. So, the need for efficient computing devices should drive massive demand for computer hardware, especially hard disk drives (HDDs) and solid-state drives (SDDs). The continuing digital transformation is also driving the demand for computer hardware. In fact, the global computer hardware market is expected to grow at 6% CAGR to  $1.18 billion by 2025. Consequently, both WDC and STX should see soaring demand for their products in the coming months.

But while WDC’s share price declined  9.2% over the past month, STX has declined only marginally. In terms of the past six months’ performance, STX is a clear winner with 33% gains versus WDC’s 23.5%. But, which of these stocks is a better pick now? Let’s find out. 

Latest Movements 

On June 22, 2021, WDC announced its second-generation UFS 3.1 storage solution for smartphones, named Western Digital iNAND MC EU551, that delivers high-performance storage for consumers while using ultra-high-resolution cameras, AR/VR, gaming, and 8K video and other applications. As networks continue to expand available bandwidth and offer lower latency to enable new user experiences, WDC’s iNAND solutions are expected to see good demand in the coming months.

WDC announced the availability of its new high-performance Ultrastar Edge server family on June 15. The product  brings computers closer to where data is generated for faster processing, lower latency, and real-time decision making, even when disconnected. Amid the growing adoption of 5G, IoT, and the cloud, the need for secure and easy transport, deployment, and data analysis at the edge, is likely to generate high demand in the coming months.

On June 23, 2021, STX launched its newest PC gaming SSD, the FireCuda 530, at its inaugural virtual gaming event, SG21. This new drive offers gamers the latest PCIe Gen4 NVMe SSD technology and the fastest performance from STX’s line of PC gaming storage products, thus bringing speed, endurance, and high capacity to the peak of PC performance. STX expects to witness good demand for this drive in the coming months.

On June 22, STX launched the new Exos CORVAULT high-density storage system, a uniquely intelligent category of mass-capacity storage designed to streamline data management and reduce human intervention for macro edge and data center environments. STX’s new VelosCT chip powers the system’s dual storage controllers, driving superior performance, while STX’s Advanced Distributed Autonomic Protection Technology (ADAPT) offers advanced data protection and fast rebuilds without sacrificing performance. As a result, STX expects to gain widespread recognition of this storage system across the industry.

Recent Financial Results 

WDC’s revenue for its fiscal third quarter, ended April 2, 2021, decreased marginally year-over-year to $4.14 billion. The company’s non-GAAP gross profit came in at $1.14 billion, down 1.8% from the prior-year period. Its non-GAAP operating income was $412 million, representing  a 3.5% year-over-year decline. However, its non-GAAP net income increased 23.7% year-over-year to $318 million, and its non-GAAP EPS increased 20% year-over-year to $1.02. As of April 2, 2021, the company had $2.73 billion in total cash and cash equivalents.

For its fiscal fourth quarter, ended July 2, 2021, STX’s revenue increased 19.7% year-over-year to $3.01 billion. Its  non-GAAP gross profit has been reported at $892 million, representing a 30% improvement year-over-year. STX’s non-GAAP income from operations came in at $546 million, up 46.4% from the prior year period. While its non-GAAP net income increased 49.8% year-over-year to $466 million, its non-GAAP EPS increased 66.7% year-over-year to $2. The company had $1.21 billion in cash and cash equivalents.

Past and Expected Financial Performance 

WDC’s net income and EPS have grown at CAGRs of 20.4% and 19.5%, respectively, over the past three years.

Analysts expect WDC’s revenue to increase 24.9% year-over-year in the current quarter (ending September 30, 2021) but decline 1.1% in the current year and increase 21.8% next year. Its EPS is expected to increase 209% in the current quarter, 27.3% in the current year, and 128.4% next year. Analysts expect the stock’s EPS to grow at a 47.8% rate  per annum over the next five years.

In comparison, STX’s net income and EPS have grown at CAGRs of 3.6% and 9.8%, respectively, over the past three years.

Analysts expect STX’s revenue to increase 34.2% year-over-year in the current quarter (ending September 30, 2021), 10.5% in the current year, and 2.4% next year. Its EPS is expected to increase 138.6% in the current quarter, 45.2% in the current year, and 6.5% next year. The stock’s EPS is expected to grow at a 15.4% rate  per annum over the next five years.

Profitability 

WDC’s trailing-12-month revenue is 1.5 times STX’s. However, STX is more profitable, with a 14.1% EBIT margin versus WDC’s 4.4%.  

Also, STX’s ROE, ROA, and ROTC values of 108.7%, 10.7%, and 15.9%, respectively, compare favorably with WDC’s 3.6%, 1.8%, and 2.4%.   

Valuation 

In terms of non-GAAP forward P/E, WDC is currently trading at 16.61x, which is 57.6% higher than STX’s 10.54x. WDC’s 0.78x non-GAAP forward PEG is 14.7% higher than STX’s 0.68x.  

Also, in terms of forward EV/EBITDA, WDC’s 9.04x is significantly higher than STX’s 8.92x. 

POWR Ratings 

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

Both the stocks have B grades for Growth, which is consistent with the  growth in their financials over the past year. STX has witnessed a 41.4% year-over-year rise in EPS. WDC’s operating cash flow has increased 31.1% over the past year.

In terms of Quality, STX has been graded a B, consistent with its higher-than-industry profitability ratios. STX’s 17.8% trailing-12-month EBITDA margin is 24.5% higher than the 14.3% industry average. In comparison, WDC has a C grade for Quality, which is in sync with its slightly lower-than industry profit margin. The company has a 12.7% trailing-12-month EBITDA margin, 11.5% lower than the 14.3% industry average.    

Of the 45 stocks in the B-rated Technology – Hardware industry, WDC is ranked #31, while STX is ranked #22.   

Beyond what we’ve stated above, our POWR Ratings system has also rated WDC and STX for Value, Sentiment, Momentum, and Stability.  

Get all WDC ratings here. Also, click here to see the additional POWR Ratings for STX.  

The Winner 

The rising demand for efficient and secure data storage solutions from almost all economic sectors should benefit both WDC and STX. However, we think it’s better financials, higher profitability, and relatively lower valuation make STX 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. 

WDC shares were trading at $61.42 per share on Tuesday afternoon, down $2.85 (-4.43%). Year-to-date, WDC has gained 10.89%, versus a 17.65% 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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