Wall Street analysts rushed to weigh in after storage maker Western Digital (WDC.US) reported better-than-expected first-quarter results and guidance, while also indicating that capital expenditures will rise in the coming years. Shares fell 4% in premarket trading, and rival Seagate (STX.US) slipped alongside it.
Wells Fargo analyst Joe Quatrochi said concerns about higher spending are "overblown" and urged investors to buy the dip. "We remain positive on Western Digital following solid fiscal 2027 first-quarter results and guidance," Quatrochi wrote in a note to clients. "We believe fears around elevated capex to support additional head/media capacity and the HAMR transition are misplaced, and we see a positive setup under [accelerating] EB growth [continuing into] 2028 and a path toward gross margins above 70%." Quatrochi rates Western Digital with a $450 price target.
On the earnings call, Western Digital management said it expects capital expenditures to average 4% to 6% of revenue over the next five years, with spending slightly higher over the next two years. At the same time, however, the company set a goal of reducing cost per terabyte by about 10% year over year to help offset rising input costs.
Morgan Stanley analyst Erik Woodring also said the selloff triggered by rising costs is unjustified. Woodring explained, "Since the spin-off of SanDisk (SNDK.US), Western Digital has been consistent — they need to invest in head/media/substrate capacity (plus automation tools) to support the product mix shift toward high-capacity drives with 10-14 platters," "Even back in September, when referring to capex as a percentage of revenue, Western Digital said '…over the next few years, we may be slightly above this [4%-6%] range, but on a five-year basis, it should fall within or near this 4%-6%.' So last night's capex commentary — which sent shares down 6.5% after hours even though results and guidance broadly beat and were raised — is entirely consistent with what the company had already communicated to the market." Woodring reiterated an "overweight" rating on Western Digital and raised his price target to $668 from $643.
JPMorgan analyst Joseph Cardoso likewise said concerns about capital expenditures are exaggerated. "While the recent decline in cost per terabyte remains weighed down by product transitions and input cost inflation, management emphasized confidence in returning to a 10% reduction through higher areal density and value engineering initiatives," Cardoso wrote. "To that end, we believe this report reinforces a favorable supply-demand setup for Western Digital and the HDD industry as a whole, with sustained pricing strength and accelerating EB shipments further supporting margin expansion and earnings leverage." Cardoso reiterated an "overweight" rating on Western Digital and raised his price target to $650 from $600.
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