Despite strong quarterly results from Western Digital (WDC.US) amid ongoing artificial intelligence-driven demand for data storage, the company's stock declined in after-hours trading, signaling market caution regarding supply-demand dynamics and valuation pressures within the sector. For the third quarter of fiscal year 2026, Western Digital reported adjusted earnings per share of $2.72, a significant increase from $1.36 in the same period last year and well above the market consensus of $2.39. Revenue rose 45% year-over-year to $3.34 billion, also exceeding analyst expectations. The company surpassed its previously provided guidance range. Looking ahead, Western Digital anticipates fourth-quarter revenue to grow between 36% and 44% year-over-year, reaching approximately $3.65 billion, with a midpoint adjusted EPS forecast of $3.25, higher than the market's expectation of $2.75. Gross margin is projected to improve to 51%-52%. Additionally, the company announced a 20% increase in its quarterly dividend to $0.15 per share. CEO Irving Tan noted that nearly all AI workloads—from model training and inference to agent AI and physical AI—generate massive amounts of data, which require long-term, low-cost storage solutions such as hard drives, serving as a core driver of demand growth.
At the industry level, accelerating AI infrastructure development has fueled a broad surge in demand for data storage and memory chips. Tech giants including Amazon (AMZN.US), Microsoft (MSFT.US), Alphabet (GOOG.US, GOOGL.US), and Meta Platforms (META.US) are projected to invest over $700 billion in AI data centers this year, further boosting storage demand. This trend has driven substantial stock gains across the storage and memory chip sector. Year-to-date, Western Digital's shares have risen more than 150%, soaring approximately 891% over the past 12 months. Seagate Technology (STX.US) has advanced about 145%, while SanDisk Corp. (SNDK.US) surged 362%, and Micron Technology (MU.US) gained around 81%.
However, the AI investment boom has introduced new challenges. On one hand, manufacturing capacity for hard drives and memory chips remains constrained, leading to supply shortages and rising prices. On the other, concerns are mounting over high valuations and the sustainability of demand. Both Western Digital and its competitor Seagate face production limitations, with new capacity not expected to come online until mid-next year, implying continued tight inventories and elevated prices in the near term. Meanwhile, certain AI-related stocks have recently experienced volatility. For instance, news of OpenAI's growth falling short of expectations triggered a brief pullback in AI-themed stocks. Although Seagate's earnings later lifted market sentiment, volatility remains elevated.
Notably, despite its robust performance, Western Digital's stock fell more than 7% in after-hours trading following the earnings release. Analysts suggest this reaction may stem from already high market expectations and investor concerns about the longevity of the AI capital expenditure cycle. On the same day, SanDisk reported even stronger results. The company's third-quarter adjusted EPS reached $23.41, far exceeding the consensus estimate of $14.62 and reversing a year-earlier loss. Revenue jumped 251% year-over-year to nearly $6 billion. Its gross margin stood at 78%, with guidance for the next quarter pointing to 80%, well above industry norms. Data center revenue skyrocketed 645% annually, serving as the primary growth driver. Nevertheless, SanDisk's stock still dropped around 8% after hours, indicating market skepticism about the sustainability of such high growth.
Analysts highlight that the storage industry is currently in an AI-driven supercycle with clear demand growth drivers, but it also faces issues such as supply bottlenecks, rising costs, and elevated valuations. Nvidia CEO Jensen Huang previously stated that as AI servers drive soaring demand for high-speed memory, the memory chip market is poised to expand further, potentially becoming one of the largest semiconductor segments.
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