What a fantastic six months it’s been for Western Digital. Shares of the company have skyrocketed 155%, hitting $260.97. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Following the strength, is WDC a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.
Why Does WDC Stock Spark Debate?
Founded in 1970 by a Motorola employee, Western Digital (NASDAQ: WDC) is a leading producer of hard disk drives, SSDs and flash memory.
Two Things to Like:
1. Operating Margin Rising, Profits Up
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Looking at the trend in its profitability, Western Digital’s operating margin rose by 16.1 percentage points over the last five years, showing its efficiency has meaningfully improved. . Its operating margin for the trailing 12 months was 29.3%.
2. Increasing Free Cash Flow Margin Juices Financials
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, Western Digital’s margin expanded by 14.7 percentage points over the last five years. This is encouraging because it gives the company more optionality. Western Digital’s free cash flow margin for the trailing 12 months was 21.5%.
One Reason to be Careful:
Revenue Spiraling Downwards
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Western Digital struggled to consistently generate demand over the last five years as its sales dropped at a 8% annual rate. This wasn’t a great result, but there are still things to like about Western Digital. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
Final Judgment
Western Digital’s merits more than compensate for its flaws, and after the recent rally, the stock trades at 23.8× forward P/E (or $260.97 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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