Western Digital (NYSE: WDC) Stock Presents Buying Opportunity

Data storage products maker Western Digital Corporation NYSE: WDC stock has been in decline after guiding down forecasts on its Q4 fiscal 2020 earnings release. As the bench S&P 500 index NYSEARCA: SPY grinds towards its February 2020 all-time highs, WDC appears to be on a trajectory towards its COVID-19 pandemic lows as it also drags down its peer Micron Technologies NYSE: MU. While semiconductor stocks that normally move together have recently gone through a decoupling, they usually revert back to the prior hierarchy of price behavior. While many investors are exiting WDC, the right price can turn trash into treasure. Nimble risk-tolerant investors should monitor the selling for opportunistic pullback opportunities as prices become more appealing. 

Q4 FY 2020 Earnings Release

On August 5, 2020, Western Digital released its fourth-quarter fiscal 2020 results for the quarter ending June 2020. The Company reported earnings of $1.23 per share versus $1.22 per share, beating consensus analyst estimates by $0.01 per share. Revenues grew 18% year-over-year (YoY) to $4.29 billion falling short of consensus estimates of $4.34 billion. Western Digital shocked analysts by issuing downside guidance for Q1 fiscal 2021 earnings per share (EPS) of $0.45 to $0.65 versus $1.32 consensus analyst estimates. The Company cut Q1 fiscal 2021 revenue forecasts to $3.70 to $3.90 billion from $4.36 billion consensus estimates. While Data Center Devices and Solutions revenues grew to $1.68 billion up 32% YoY, Client Solutions declines 9% to 687 million. This makes sense as pandemic-related activities like remote work, school/learn from home, streaming and gaming trends bolstered Data Center while office and brick and mortar closures hit Client Solutions.

Pandemic Wins and Losses

During the earnings conference call, Western Digital noted their distribution channel of 350,000 global points of purchase that were impacted by COVID-related closures. The Company has started to see recovery as lockdown restrictions got lifted in June and continued into July. Geopolitical tensions can have an impact on demand. Flash storage and device revenues were $2.2 billion up 9% sequentially and an impressive 49% YoY. Legacy hard drive revenues were down (-4%) YoY as average price per hard drive increased to $87, largely due to continued cloud migration. The sharp spike from pandemic demand in Data Center Devices and Solutions is expected to fall (reversion) while Client Service is expected to rebound moving forward, however, not nearly as much as the drop in Data Center. This is what is driving the downside forecasts for fiscal Q1 2021.

Bleak Sentiment Getting Bleaker

A week before WDC earnings, storage device maker Seagate Technology NASDAQ: STX cast a dark cloud on the industry reporting a fiscal Q4 earnings miss despite the June quarter seeing robust demand in cloud and data center. The narrative of the storage and memory chip industry was further negatively impacted on August 13, 2020 at a Keybanc-hosted fireside chat. Micron Technologies CFO David Zinsner mentioned fiscal Q1 2021 revenues will likely come in below forecasts but expects fiscal Q4 to be back-end loaded. In essence, the strong demand in Data Center was mainly due to the surge from pandemic related activities and are expected to see a reversion in fiscal 2021 across the board with fiscal 2H 2021 seeing a lift. Since markets are always projecting forward, the extreme selling among storage and memory devices can provide an opportunity at key price levels.

 WDC Opportunistic Price Levels

Using the rifle charts on the monthly and weekly time frames provides a broader view of the landscape for WDC stock. The monthly rifle chart is in an accelerating downtrend with a bearish stochastic mini inverse pup after rejecting back down under the 5-period moving average (MA) at $47.66. The monthly lower Bollinger Bands (BBs) are near the $29.59 Fibonacci (fib) level. While the weekly rifle chart triggers a market structure low (MSL) buy above $46.19, the bearish stochastic mini inverse pup forecasts a lower BB target near the $33.83 fib with 5-period MA resistance at $38.86. Due to the cascading sequence of negative news (STX earnings miss, WDC lowered guidance, MU lowered revenues), the accelerated selling on WDC is quickly becoming overextended. This provides opportunistic pullback entries for nimble traders at the $33.88 weekly lower BBs/fib, $32.33, $30.88 fib and $29.59 monthly lower BBs/fib. A reversion bounce to the weekly 5-period MA area is a good profit taking level for nimble traders. Investors should continue to monitor peers MU and STX exclusively with WDC to gauge sentiment in real-time. The normal hierarchy of price action starts with MU followed by WDC and then STX.