Western Digital Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of Western Digital (NAS:WDC, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $71.87 per share and the market cap of $22 billion, Western Digital stock appears to be significantly overvalued. GF Value for Western Digital is shown in the chart below.
Because Western Digital is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 1.13% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Western Digital has a cash-to-debt ratio of 0.31, which ranks worse than 85% of the companies in Hardware industry. Based on this, GuruFocus ranks Western Digital's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Western Digital over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Western Digital has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $16.3 billion and earnings of $1.12 a share. Its operating margin is 4.73%, which ranks in the middle range of the companies in Hardware industry. Overall, the profitability of Western Digital is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Western Digital over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Western Digital's 3-year average revenue growth rate is worse than 66% of the companies in Hardware industry. Western Digital's 3-year average EBITDA growth rate is -20%, which ranks worse than 84% of the companies in Hardware industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Western Digital's return on invested capital is 2.75, and its cost of capital is 13.56.
In summary, the stock of Western Digital (NAS:WDC, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 84% of the companies in Hardware industry. To learn more about Western Digital stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
