Western Digital (NASDAQ: WDC) is an American manufacturer of high-tech products. Thanks to the shortage of semiconductors, the company increased the margins of the business, but her old problems haven't gone away..
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What do they make money on
Western Digital makes hard drives and other high-tech products for storing and processing information. According to the company's annual report, its revenue is divided into two product segments:
- HDD disks - 48,35%.
- Flash memory - 51,65%.
By final markets, the company's products are divided as follows:
- Client devices - 48,58%. Western Digital Products, which then ends up in the PC, Laptops, Consoles, car industry and other places.
- Data center devices and solutions - 29,13%. High performance SSD and HDD, as well as technology platforms.
- Client solutions - 22,29%. Flash drives and hard drives for the consumer segment.
Geographically, the company's revenue is divided as follows:
- USA - 22,29%.
- China - 25,53%.
- Hong Kong - 21,32%.
- Other regions of Asia - 8,78%.
- Europe, Middle East and Africa - 18,01%.
- Other regions - 4,07%.
Arguments in favor of the company
Deficit time. The shortage of semiconductors, coupled with a sharp increase in demand, has allowed chip manufacturers to increase prices for their products.. This is clearly seen in the report of Western Digital itself for the last quarter.: the gross margin of the HDD division increased from 26.2 to 30,9%, and for the flash unit - from 26.4 to 37%. This state of affairs won't last forever., but so far Western Digital is benefiting from it.
Flesh Maidenda. In May 2020, something happened to the company's dividends, what can happen to the dividends of any company: they were canceled completely unexpectedly for everyone against the backdrop of an excellent report and a reduction in debt burden. The company went for it, to invest in business development and reduce the remaining debt. Before that, the company paid 2 $ per share per year, which gave almost 4% annual. By the standards of the tech sector, this was a huge return..
The company is doing better today, than in may 2020: the debt burden has decreased, and revenue and profit have grown significantly. Means, the company after some time can return dividends. If this happens in its original form - 2 $ per share, then it will take about 41% from her profits for the past 12 months. I think, that Western Digital's management may well go for it: there is enough money. And if it doesn't work, that is, the probability, that a share in the company will be redeemed by some activist investor, which will require the return of dividends in full, based on these factors, - and, can, will even bring the case to court.
Such a campaign against the management of Western Digital will contribute to the growth of quotations, as investors will expect a favorable outcome. An argument can serve even that, that the competitor Seagate pays almost 2,76% per annum in dividends.
Diversification. No client of the company gives her more 10% from proceeds. It's good, because it neutralizes the risks of changing the relationship of one of the clients with Western Digital. If one client leaves, the final result of the company will not deteriorate much.
Inexpensive. The company is inexpensive in every sense: P / E she has 12,73, P / S — 1,03, and capitalization is about 18.86 billion dollars. All this contributes to, that someone bigger can buy a company. This scenario fits well with my expectations of an attack by an activist investor on the company's management.: such an investor can persuade shareholders and management to sell the company. Sounds logical, because the last 5 years, the value of Western Digital shares has been marking time, and dividends are no longer paid. There is little sense in the further independent existence of Western Digital without dividends for its shareholders.. Strictly speaking, there is no point in it.
What can get in the way
Absolutely anything. All production enterprises suffer today from logistic problems and rising cost of raw materials.. Considering, that Western Digital has a business worldwide and only a third of its assets are located in the United States, it will surely suffer. for example, its quarterly results may be affected by the outbreak of coronavirus in Malaysia, where the company has many production facilities.
The company has already announced that, that her profit in the current quarter will fall due to logistical problems. So shareholders should prepare for bad news..
Long-term asset value of Western Digital by country and region, million dollars
|Rest of Asia||366||398|
|Europe, Middle East and Africa||51||44|
Music won't last forever. Western Digital operates in a highly competitive environment. Seagate and Toshiba make HDDs just as good, and in the case of flash memory strong competitors - even more. The presence of such a large number of strong competitors forces Western Digital to spend copiously on the modernization of production facilities..
Due to the great competition in the event of an increase in product prices, all market players begin production in huge quantities. This leads to an overproduction crisis, falling prices and margins for all players - about the same as with oil. It is hard to say, when the prices for the company's products return to normal. Analysts at Gartner believe, that it will happen in the second half of 2022. Meanwhile, prices have already begun to fall., which means, Western Digital's revenue and profit growth will soon start to falter.
You don’t need these dividends. Returning dividend payments can be a big mistake. To date, the company has $ 15.030 billion in arrears, of which 4.709 billion needs to be repaid within a year. She has a lot of money at her disposal, but it is better to spend free funds on reducing the debt burden due to the impending increase in interest rates FED and, Consequently, rise in price of loans.
One can object to this, that there are many companies, who pay dividends, having a higher level of debt burden, than Western Digital. But, Firstly, such companies set a bad example. Secondly, the company needs to update fixed assets in the amount of about 1.5-2 billion dollars a year. Thirdly, the threat of falling prices for the company's products, like the Sword of Damocles, always hangs over its business. So if the management of Western Digital will be against the return of payments, this will provide the company with a comfortable survival.
China. Most of the company's sales are in China. Therefore, it is always worth keeping in mind the risk of Americans imposing bans on the export of high-tech products.. The risk is hypothetical, but it should be considered.
What is the bottom line
Western Digital is an interesting company, and you can invest in it with an eye to the return of dividends and / or the actions of some activist investor. At the same time, the company has more than enough problems. So the decision to invest in these stocks should be made at your own risk..