Western Digital Sees Rally Succumb to New Worries
By ANDREW SIMONS
Lake Forest-based Western Digital Corp., one of last year’s big turnaround stories, has done another about face on Wall Street.
Since April, shares in the disk drive maker have fallen more than 40% from their year high hit in April. As of last week, they were trading around 4,or where they were before Western Digital’s eye-catching increase late last year. The company counted a market value of nearly $800 million at recent check.
So why the slide? Fears of renewed price wars in the disk drive market, worries about softer sales of some drives and continued uncertainty about the shaky personal computer market, analysts say.
Last month, JP Morgan Chase & Co. cut its profit forecast for Western Digital’s current quarter by a penny a share. The company’s share fell 18% on news of the cut.
A company formed by IBM Corp. and Hitatchi Ltd. in April to sell data storage systems has analysts concerned about the drive market. New competition from the venture could bring down drive prices this year.
“The IBM/Hitatchi venture should be a long-term positive for the drive industry as it leads to further consolidation,” said Glen Ingalls, an analyst with SoundView Technology Group Inc., in a report. “But in the current quarter, it is leading to soft pricing.”
Continuing slow sales of personal computers also is clouding the outlook for Western Digital. PC sales have dropped nearly 17% year-to-year this month, according to SoundView.
Western Digital told analysts the company saw its April sales decline, leading the company to predict shipment volume in the June quarter would decline in the low-single-digit percentages.
“The stock may be in for a pause, given the comments about pricing pressure on (low-end) drives and slower unit volumes in April,” said Ingalls, who has a “hold” rating on Western Digital shares.
But the decline could be only a blip. May sales improved from April, according to Kimberly Alexy, an analyst with Prudential Securities.
“We expect continued sequential improvement throughout the quarter,” she said in a report.
Western Digital has transformed itself in the past year. The company has reported two back-to-back profitable quarters, while its mainstay drive business has been profitable for six straight quarters. Last year, Western Digital bought a 155,000-square foot drive plant in Thailand from Fujitsu Ltd.
The company also has been busy finding new markets for its drives. Last year, Western Digital struck a deal to supply Microsoft Corp. with drives for its Xbox game console. But Xbox isn’t without concerns either.
Questions about Xbox’s potential arose earlier this year when contract Xbox producer Flextronics International Ltd. told analysts that output of the console had slowed from a brisk start around the holidays, when 75% of retailers carrying the console sold out.
Microsoft said it expects to sell about 3.5 million to 4 million Xbox units for the year, compared with previous estimates of 4.5 million to 6 million. Western Digital hasn’t said how many drives it expects to sell to Microsoft, but that it is growing.
“In the March quarter, a little over 10% of our unit volume was shipped into the gaming console market, a product category that didn’t exist one year ago for our industry,” Western Digital chief Matt Massengill said in a statement. “We are just beginning to participate in the emerging consumer-related growth markets for rotating magnetic storage devices, markets that require modest additional investments.”
Western Digital executives have said their goal is to become the premier maker of drives for game consoles. When Sony Corp. and Nintendo Co. put hard drives in their game machines, Western Digital hopes it’ll be the first company they’ll go to.