Western Digital Earnings Fail to Get Stock Back on Track

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Western Digital stock fell modestly in premarket trading Friday even after the hard-drive maker handily beat expectations for its fiscal first-quarter earnings.

Investors wanted widening profits and an optimistic second-quarter outlook from the hard-drive maker to ease concerns the hard-drive boom has plateaued. They got just that, but the strong results weren't enough to overcome a faltering artificial-intelligence trade.

Shares of Western Digital dropped 0.9% to $350.89 in premarket trading. The stock had fallen 6.4% in regular trading Thursday, leaving it down 53% from its closing high on June 18.

AI both requires and produces massive amounts of data. Hyperscalers store files that aren't immediately needed on hard-disk drives, or HDDs, and Western Digital and Seagate Technology are the only U.S. companies that produce them. But the HDD business is notoriously cyclical, so Wall Street needs continual evidence that hard-drive makers still have room to raise prices and expand margins.

Western Digital reported adjusted earnings of $4.64 a share for the September quarter, surpassing Wall Street's call for $4.11 a share, according to FactSet. Revenue surged 55% year over year to $4.4 billion, ahead of analysts' consensus estimate of $4.1 billion.

The company's adjusted gross margin -- an indicator of its pricing power in negotiations with customers -- rose to 58.1% from 54.4% the previous quarter and 43.9% a year ago.

A strong outlook for the current quarter offered further indication the HDD market has yet to peak. Western Digital expects revenue of $5.1 billion, plus or minus $100 million, for the fiscal second quarter, besting analysts' estimates of $4.6 billion. The company anticipates its adjusted gross margin will expand to between 60% and 61%.

But if the stock's drop on Thursday is any indication, investors still have concerns. Most notably, Western Digital stock took a hit earlier this month after a report from Nikkei that Japanese supplier Toshiba plans to double its production capacity for drives used in AI data centers in fiscal 2027.

Western Digital CEO Irving Tan brushed off suggestions that Toshiba's new supply investments could weaken the company's leverage when negotiating with customers.

"We don't see any change in terms of the long-term fundamentals of both the industry or our business," Tan said on a conference call Thursday, adding the company would focus on making more advanced drives rather than producing more units.

Concerns about production costs may also have been weighing on the stock. Western Digital's hard-drives incorporate some memory-chip content, which is in extremely tight supply.

The company expects to reduce its cost per terabyte -- a measure of stored data -- by 10% year over year, but progress could be slower than that in the near term, Tan warned.

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