Shares of Western Digital (NASDAQ: WDC ) declined by 3% after the company conducted an Investor Day ahead of its planned separation of the Flash business. The event was intended to outline the future direction and strategy for Western Digital as an independent entity focusing on HDD, storage platforms, and technological innovation.
Analysts had been anticipating the Investor Day, with expectations largely aligned with the consensus. Krish Sankar of TD Cowen noted, "We think the AD was nearly in line with consensus view getting into the event. Some investors would have hoped for a higher GM outlook than the 'at least 38%' provided, but we think management is being conservative. HAMR timeframe suggests 2-3 year lead for STX, but given WDC's flawless execution on the GM front, we think investors are willing to be patient on HAMR."
Despite the stock's decline, Western Digital projected confidence in its gross margin progress and its position in the industry. Two years ago, skepticism was high regarding the potential for HDD gross margins to reach their current level of 38% at Western Digital. This improvement has been attributed to a higher mix of cloud-based solutions, optimized cost structures, and increased average selling prices (ASPs).
Looking ahead, Western Digital has set expectations for a revenue compound annual growth rate (CAGR) in the mid-to-high single digits, with gross margins of at least 38% and operating margins of at least 24%. These targets are based on a high comparison year in 2024, where revenues saw a 56% YoY increase. Sankar added, "Longer term, WDC expects its revenue CAGR to be mid-to-high single digit percent with GMs of at least 38% and operating margins of at least 24%. This is off a CY24 high base where revenues were up 56% Y/Y and is slightly higher than our 6% revenue CAGR for C24-26."
Moreover, the company anticipates its nearline exabyte growth to be at a 23% CAGR through 2028, with 800 basis points driven by AI. This outlook is more optimistic than some analysts' forecasts, which predicted mid-teens exabyte growth for Western Digital in calendar year 2025 and high-teens in 2026.
Western Digital also highlighted that it is currently testing its Heat-Assisted Magnetic Recording (HAMR) technology with two cloud customers and could produce a 40TB HAMR drive today. However, manufacturing yields and customer total cost of ownership (TCO) are not yet at optimal levels. The company expects to qualify HAMR with customers by the end of calendar year 2026, with volume production in the first half of calendar year 2027.
In the near term, Western Digital's management is confident that the recent slowdown in nearline HDDs is a temporary setback, expecting a return to healthy growth in the coming years. The cloud segment is projected to account for more than 88% of Western Digital's HDD revenues by 2025, with the overall cloud market growing at a mid-teens CAGR from 2024 to 2028.