Financial guidance completely exceeded expectations, but Western Digital (WDC.US) was sold off! Wall Street is strong: capital expenditure concerns have gone too far

The Zhitong Finance App noticed that Wall Street analysts expressed their opinions after the storage manufacturer Western Digital (WDC.US) announced better-than-expected results and guidelines for the first fiscal quarter; at the same time, the company said that capital expenditure will increase in the next few years.

The company's stock price fell 4% before the market, and rival Seagate (STX.US) also fell.

Wells Fargo analyst Joe Quattrozzi said that concerns about increased spending were “excessive” and urged investors to buy on dips. “After steady results and guidance for the first fiscal quarter of FY2027, we are still optimistic about Western Digital,”

Quattrozzi wrote in a report to clients. “We believe that concerns about raising capital expenses to support additional head/disc production capacity and HAMR transformation are misplaced, and see a positive layout [of accelerated] EB growth [continuing until] 2028 and moving towards a gross margin of over 70%.”

Quattroch gave Western Digital a rating, with a target price of $450.

At the performance conference call, Western Digital's management said that capital expenditure is expected to account for an average of 4% to 6% of revenue over the next five years, of which expenses will be slightly higher in the next two years. However, the company also aims to reduce the cost per terabyte by about 10% year over year to help offset rising investment costs.

Morgan Stanley analyst Eric Woodlin also said that the sell-off caused by rising costs was unreasonable.

Woodlin explained, “Since the divestment of SanDisk (SNDK.US), Western Digital has always been on the same page — they need to invest in head/plate/substrate production capacity (plus automation tools) to support the product structure switch to 10-14 disc high-capacity hard drives,” “Even in September, when referring to capital expenditure as a share of revenue, Western Digital said '... In the next few years, we may be slightly above this [4%-6%] range, but looking at a five-year period, it should fall within or close to this 4%-6%' range. So last night's capital expenditure statement — which caused the stock price to fall 6.5% after the market despite completely exceeding expectations and rising results and guidelines — is exactly in line with the message the company has already conveyed to the market.”

Woodlin reiterated Western Digital's “overbearing” rating and raised the target price from $643 to $668.

Joseph Cardoso, an analyst at J.P. Morgan Chase, also said that concerns about capital expenditure have been exaggerated. “Although the recent decline in cost per terabyte is still being dragged down by product transformation and investment cost inflation, management emphasized that they are confident of returning to the 10% decline through higher magnetic recording density and value engineering initiatives,” Cardoso wrote. “To this end, we believe that this financial report strengthens the positive supply and demand pattern of Western Digital and the HDD industry as a whole. Continued strong pricing and accelerated EB shipments will further support profit margin expansion and profit leverage.”

Cardoso reiterated Western Digital's “overbearing” rating and raised the target price from $600 to $650.