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Why Western Digital Surged Today – The Motley Fool



What happened

Shares of Western Digital (NASDAQ: WDC) jumped on Thursday following an earnings report from fellow memory chip manufacturer Micron Technology (NASDAQ: MU) that was interpreted as a positive for the industry. While Micron provided terrible third-quarter guidance, management continued to predict a recovery in the second half of the year. Shares of Western Digital were about 9.8% at market close, while Micron stock was up at about 9.7%.

So what

On top of selling hard drives and solid state drives, Western Digital manufactures NAND memory chips. Those chips are in a state of oversupply, which is driving down prices

 A rising chart

Image source: Getty Images

Micron managed to grow its NAND bit shipments during the fiscal second quarter versus the first quarter, but prices plunged. Bit volume was up a high single-digit percentage, and average selling price was down around 25%. That led to an overall decline in NAND revenue.

Micron's third-quarter guidance suggests the pain isn't over. The company expects total revenue to plunge nearly 40% year over year, and it expects non-GAAP earnings per share to nearly 75%. But management sounded optimally about the second half of the year. The company sees a resumption of growth in the data center market as excess customer inventory is exhausted, and it expects overall NAND demand to improve in the second half.

Micron's forecast was enough to push up shares of Western Digital.

Now what

While Micron's management talked about a second-half recovery, investors may not want to take that outlook as gospel. Micron has been wrong about the severity of this downturn so far, so take management's assurance with a grain of salt.

Management also called its language a bit during the earning call. Micron CFO Dave Zinsner said: "Our visibility remains low, and the near-term environment remains challenging." CEO Sanjay Mehrotra said Micron's outlook depends on the macroeconomic climate not getting any worse. In other words, a second half recovery is still a thing of the past.

A bit of optimism against the backdrop of a tough memory chip market drove Western digital stock higher today. It won't last if a second-half rebound doesn't materialize.


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