Western Digital Had Good Earnings. But Gross Margins Could Improve

Western Digital (WDC) Saw its revenue increase by 18% YoY. It had another record quarter for its flash storage business. Two out of its three business segments did very well. How many companies in today's economy can actually say that it's growing revenue at a double-digit pace?  If you look at the Dow Jones Industrial Average (DJIA) 20 out of 30 companies in that index saw YoY EPS decline. 

Exhibit: WDC showed good revenue growth in Q4 FY 2020

(Source: SeekingAlpha)

Its Data Center business continue growing and its revenue increased 32% YoY. Its Client Devices business grew revenue by 19% YoY. But due to the closure of retail stores because of the pandemic, its Client Solutions business suffered.

(Source: SeekingAlpha)

The company has made it a priority to pay down debt. Its gross margins have shown improvement but it could improve further. Gross margin percentage has gone from 24.2% in Q4 FY 2019 to 28.9% in Q4 FY 20.

(Source: SeekingAlpha)

(Source: SeekingAlpha)

For example, the company's non-gaap gross margins were at 43% in Q2 of FY 2018.  So, it's possible for Western Digital to improve its gross margins substantially. 

Exhibit: In Q2 FY 2018 WDC had Good Gross Margins. It's possible for WDC to get to this level again. 

(Source: SeekingAlpha)

I see there could be two drivers for gross margin improvement in the second-half of the year.

• The release of new video game consoles from Playstation and Xbox should drive demand for storage demand and lift the average selling price (ASP)
  
• The company's 16-TB and 18-TB hard drives based on HAMR technology should see good demand in the cloud space. 
  

I had recently done an article on SeekingAlpha and I had covered both Micron (MU) and Western Digital as part of that.      

(Disclosure: I own both MU and WDC)