Western Digital's HDD Surge Highlights Cyclical Rebound Amid Overvaluation Concerns

What happened

Western Digital's HDD business is driving revenue growth due to increased demand for higher-capacity drives from hyperscale customers, as highlighted in a recent Zacks article. However, DeepValue's analysis reveals this growth follows severe losses in prior cycles and stems from operating leverage off a trough, not a structurally improved earnings base. The stock has soared approximately 289% over the past year, now trading at elevated multiples of 24.5x P/E and 34x EV/EBITDA, which is 271% above its DCF value of $48.88 per share. Critical risks persist, including high customer concentration, a leveraged balance sheet, and ongoing SSD substitution pressures that threaten HDD's long-term relevance. Therefore, while the current uptick is real, it likely does not justify the stock's lofty valuation given the cyclical and competitive nature of the HDD industry.

Implication

The news confirms WDC is benefiting from AI and cloud storage trends, but this optimism is already priced into the stock after its dramatic rally. High valuation multiples leave little margin of safety if demand normalizes or SSD substitution accelerates, exposing investors to downside risk. To shift from a STRONG SELL, WDC must demonstrate durable mid-cycle profitability, reduce leverage, and secure longer-term customer agreements to improve cash flow visibility. A significant share price correction without fundamental deterioration could eventually offer a buying opportunity, but current levels are risky given the industry's volatility. Overall, prudent investors should avoid or reduce exposure until there is clear evidence of a more stable business model or a valuation reset closer to intrinsic value.

Thesis delta

The new article does not alter the core investment thesis; it merely reinforces the cyclical recovery already documented in the DeepValue report. Investors should not interpret this short-term growth as a structural shift, as overvaluation, customer concentration, and SSD risks remain unchanged. The STRONG SELL stance remains valid unless future data shows sustained profitability across cycles or a valuation pullback improves the risk/reward profile.