Western Digital's Q2 Growth Highlights Overvaluation and Cyclical Risks

What happened

Western Digital is projected to report fiscal Q2 2026 non-GAAP revenue of $2.9B, up 20% year over year, supported by data center demand and high-capacity drives. This growth comes amid a stock that has surged ~289% in 12 months, trading at ~24.5x P/E and ~34x EV/EBITDA, roughly 271% above a cash-flow-based DCF value of $48.88 per share. The recent earnings rebound largely reflects operating leverage from a cyclical trough rather than a structurally de-risked business model, with high customer concentration and leverage adding vulnerability. Structural threats like SSD substitution and industry volatility challenge the sustainability of current performance beyond near-term cycles. Investors must look beyond the headline growth to assess whether the valuation aligns with the company's risky, cyclical fundamentals.

Implication

The 20% revenue growth validates ongoing AI and cloud-driven demand for high-capacity HDDs, which may support short-term earnings. However, the stock's elevated multiples leave little room for error if demand normalizes or SSD adoption accelerates, increasing downside risk. High customer concentration and leverage amplify exposure to any hyperscale spending cuts or pricing pressures in the volatile HDD market. Investors should avoid mistaking cyclical strength for durable profitability, given the history of severe downturns and earnings volatility. A more favorable risk-reward would require a substantial price correction or clear evidence of sustained mid-cycle cash flows and deleveraging.

Thesis delta

The news confirms the near-term demand tailwinds highlighted in the report but does not alter the core STRONG SELL thesis centered on overvaluation and cyclical risks. It reinforces that current growth is already priced into the stock, with no shift in the fundamental disconnect between price and intrinsic value.