Western Digital: The Storage Behemoth Skyrocketing on AI Demand

Key Points

• Western Digital was one of the market's most impressive stocks in 2025, and has already more than doubled in 2026.
• AI data centers are driving nearly all of the firm's demand, with agreements extending to the end of the decade.
• The firm's prioritization of R&D over production capacity is key to its strength and is important for investors to understand.

Hard disk drive (HDD) maker Western Digital NASDAQ: WDC has been in truly rarefied air when it comes to stock market performance. In 2025, the tech stock put up a total return of over 280%, ranking as the S&P 500’s third-best-performing stock of the year. Shares have not looked back whatsoever in 2026, rising well over 150%, a top-five performance among S&P 500 stocks so far.

Western Digital’s success comes as the firm is seeing rabid demand for its storage devices from artificial intelligence (AI) customers.

As AI developers continue to improve their models and have them execute more tasks, data requirements are only on the rise.

Western Digital’s latest earnings report shows that it is continuing to ride the AI wave. The firm boasts strong revenue visibility over the next several years, even as investors debate whether the stock's remarkable run still has room to grow.

Western Posts Beats on Sales, EPS, and Guidance

In its fiscal Q3 2026, Western Digital posted revenue of $3.34 billion, marking an impressive 45.5% year-over-year (YOY) increase. (Note that Western Digital’s fiscal reporting period is approximately two quarters ahead of the standard calendar year reporting period.) This marked the company’s highest revenue growth rate in nine years and moderately exceeded expectations of $3.25 billion.

Meanwhile, adjusted earnings per share (EPS) rose by 97% YOY to $2.72, exceeding estimates of $2.39, which called for growth of 76% YOY.

Guidance also came in well above expectations. Next quarter, the company expects to generate revenue of $3.65 billion at the midpoint. This would equate to growth of approximately 40% YOY, which was higher than expectations of $3.46 billion. On adjusted EPS, the firm is forecasting $3.25, or growth of 96% YOY, greatly exceeding estimates of $2.75.

Cloud Drives Big-Time Demand for Nearline HDDs

Notably, 89% of the company’s revenue during the quarter came from cloud customers, with the firm seeing very strong demand for its nearline HDDs. Nearline HDDs store very large amounts of data, and AI data centers are deploying them en masse.

The company uses exabytes to measure the capacity it sells. For reference, one exabyte is equal to a million terabytes (TB), with one TB considered a fairly large amount of data storage in a personal computer.

The company sold 199 exabytes of nearline HDDs during the quarter, an increase of 37% YOY. This compares to just 23 non-nearline HDD exabytes and an increase of 9.5% YOY, showing how nearline demand is the company’s primary growth driver. Overall, cloud revenue hit $3 billion, rising by 48% YOY.

Western: R&D Over Production Capacity

For Western Digital, it is very important to understand how the company plans to deliver more and more data storage capacity to customers going forward. The company explicitly said that it “has no plans” to increase unit HDD production.

In other words, it will not deliver more data storage by increasing the raw number of HDDs it can produce. Instead, it is investing in research and development to increase the storage capacity of each HDD. Its top competitor, Seagate Technology NASDAQ: STX, is taking a similar approach. This strategy provides several key benefits to these firms.

First off, limiting unit capacity keeps pricing power on their side. Flooding the market with more units would put downward pressure on prices, counteracting one of the key dynamics Western and Seagate are benefiting from. Western notes that prices increased by 9% YOY during the quarter.

Second, the company does not have to make massive investments in producing new facilities, allowing it to keep costs down and increase free cash flow. Western’s free cash flow rose by 124% YOY to $978 million, dramatically higher than its 13% YOY capital expenditures increase to $145 million.

Lastly, higher-capacity HDDs are higher-margin. During the quarter, Western’s gross margin rose by a whopping 1,040 basis points to 50.5%. The company notes that its shift toward higher-capacity HDDs was one of the main factors driving this.

By pursuing its strategy of increasing per HDD storage capacity, the firm can keep these key dynamics intact.

Western’s Business Is as Strong as Ever, and Everyone Knows

Western says that its long-term visibility continues to improve, with the company having agreements with hyperscalers that extend into calendar years 2028 and 2029. This is a significant supporting factor in Western’s outlook, as customers lock in orders years in advance. Combined with its strategy to not increase unit capacity, there is significant ability for Western’s margins to keep moving higher.

It’s no secret that Western has performed remarkably well, raising questions about how much farther its rally can travel. But AI demand is not slowing down, and, in general, trends for the overall AI trade continue to improve. This provides an opportunity for Western shares to keep riding higher, but investors should not overlook the risk of an AI spending pullback. With Western’s massive gains, the stock would likely be among the hardest hit should this materialize.

Still, Wall Street analysts seem to be only increasing their forecasts. The MarketBeat consensus price target on Western currently sits near $396, a figure that implies more than 10% downside in shares. Targets moved up massively after the company’s earnings report, but the stock has already caught up with many of them.

The average of targets released after the company’s earnings report is approximately $483, implying upside of less than 5%.