Western Digital capitalizes on HDD upcycle; shares soar as spin-off approaches

Western Digital (NASDAQ:WDC) rocketed more than 10% during trading early Friday as the data storage company takes advantage of the HDD upcycle ahead of its impending split.

The company provided some details to the split following the release of its first quarter fiscal 2025 financial results on Thursday.

Western Digital intends to split its hard disk drive, or HDD, and flash memory, or NAND, segments into two separately traded companies in early 2025. It is currently in a soft spin mode.

Soft-spin stage

“So we’re in the soft-spin stage, which means we’re still running the company as Western Digital,” said CEO David Goeckeler, during Thursday evening’s earnings call. “There’s one company, but behind the scenes, we’ve separated all the systems into basically two stacks of systems. So, for example, if customers want to send us orders now, they have to send us two different orders for HDDs and Flash because they go into two different sets of systems.”

“We will execute in this mode for a full quarter because we want to go through a full quarter of all the financial things we do on a monthly and quarterly basis to give ourselves confidence that both of those systems work great, and then we’ll go do the spin,” he added. “So what we expect to do now is, we will execute the business in this form for the full second quarter. We will close the December quarter as Western Digital.”

Morgan Stanley analysts, led by Joseph Moore, said the “separation of the HDD and NAND businesses will be key to unlocking value.”

“Assuming that is established in December, there should be a separation during the March quarter,” Moore said.

“To put the upside potential for WDC into context, we model $7 in EPS for CY25 with $5.70 generated from HDDs and $1.30 from Flash,” said TD Cowen analysts, led by Krish Sankar, in a note. “At 15x PE for HDD and 8x for Flash, this translates to an approximately $95 PT ($86/share for HDD, $9 Flash).”

Morgan Stanley reiterated its Overweight rating and $100 price target on Western Digital, while TD Cowen has an $80 price target.

HDD demand strong, while NAND holds on

For the meantime, Western Digital is capitalizing on strong demand from its hard disk drive segment. The company is also making progress on enterprise solid-state drives, or SSDs.

“The company had previously guided for 10% of bits this fiscal year to go into the enterprise SSD market, given very strong ramps around AI server capacity; that was already up close to 3x from last year,” Moore said. “The company indicated later in the call that they could see 15-20%.”

Competitor Micron Technology (NASDAQ:MU) recently reported about 40% of its NAND revenue comes from enterprise SSD.

Evercore ISI noted that in addition to the HDD upcycle, the flash market is also holding up better than expected for Western Digital.

“On the flash side, pricing was down slightly q/q but this was mix driven, and WDC noted flash ASPs were up 4% on a like-for-like basis,” said Evercore analyst Amit Daryanani, in a note. “HDD gross margins are well above prior peak levels, which WDC attributes to the shift towards a build-to-order model as well as the structural advantage provided by their Ultra SMR drives.”

Evercore maintains its Outperform rating and $85 price target.

Meanwhile, Mizuho reiterated its Outperform rating and $90 price target on Western Digital.

Western Digital remains attractively discounted to competitor Seagate Technology (NASDAQ:STX) and the Philadelphia Semiconductor Index (SOX) with NAND spin positive and strong margins, Mizuho noted.

Competitors Micron and Seagate were up 1.5% and 0.5%, respectively, during Friday morning trading.