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Western Digital (WDC) stock looks overvalued amid recession fears

The company's target was lowered by brokerage firm Morgan Stanley as the global recession is now the base case

After heading higher on Thursday, Western Digital Corporation’s (NASDAQ: WDC) stock looks overvalued as both the fundamentals and analysts’ growth projections do not justify the rise in market price. Meanwhile, the Covid-19 outbreak, which impacted the semiconductor sector, has triggered fears of a global recession.

Market analysts lowered their targets for certain semiconductor companies due to low visibility during the uncertain times. Western Digital’s target was lowered by brokerage firm Morgan Stanley from $69 to $61 as the global recession is now the base case.

Western Digital
Courtesy: Emilian Robert Vicol from Pixabay

In the downstream supply chain, the company continues to burn certain of its buffer inventory for meeting the shipment targets for the third quarter of 2020. Western Digital expects to have its buffer inventories back at the normal levels by the end of April. The company sees downsides in handsets and mobiles as well as in the PC segment, but expects normal business on the data center side.

The company really feels the June quarter was about the bottom of the trough. Over the last year, the company made certain cost structure adjustments. Previously, the company had projected modest growth for the first half and strong growth in the second half. However, it is likely to change, considering the spread of coronavirus.

The rise in the demand for memory chips was favorable for Western Digital till mid-January as the market was bullish on 5G-smartphone production. The company has been struggling to improve its gross margins through cost structure improvements and more effective use of working capital.

But the focus has shifted from 5G to coronavirus, which is spreading to regions outside China. According to the Microsoft Bing Covid-19 tracker, there are more than 235,000 confirmed cases around the world.

For the second quarter, Western Digital reported a narrower loss helped by lower costs and expenses, despite flat revenue. The company has been recovering from the slum, with improved performance that reflects strong execution, higher hard drive gross margin and the improving flash environment.

The company expects an accelerated recovery in flash gross margins in the first half of calendar year 2020 and beyond. For the third quarter, the company expects revenue in the range of $4.1-4.3 billion and adjusted earnings in the range of $0.85-1.05 per share.

The stock, which has fallen over 53% in the past month, showed signs of recovery as it opened higher on Thursday. However, the performance outlook remains negative for the near and long-term amid a bearish trading pattern. The shares are trading below the 50-day moving average of $58.88 and the 200-day moving average of $58.77.

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