Western Digital Corporation (WDC)

Conclusion

Western Digital Corporation designs, manufactures and sells hard disk drives and data storage products, including data center drives, external drives and network-attached storage for home and office. At a price of 263.78 USD on 6 November 2026, its market capitalisation is 98.7 billion USD.

The verdict is overvalued. Against their own ten-year medians, the price-to-earnings ratio of 9.85 is below its median of 19.33, but the price-to-free-cash-flow ratio of 23.02 sits 47.1% above its median of 15.65, and the enterprise value to EBITDA of 10.50 is 19.8% above its median of 8.77. The price-to-book ratio of 10.56 and price-to-sales ratio of 6.82 are far above their medians. The discounted cash flow gives 74.56 USD per share at a discount rate of 15.7%. The fair value band runs from 101.57 to 152.35 USD with a midpoint of 126.96 USD, a margin of safety of -51.9% at the current price. The reverse discounted cash flow implies growth of 20.6% a year, while revenue has shrunk at a 5-year compound rate of -5.3% and free cash flow per share has grown at 25.9%.

The strongest numbers are a return on invested capital of 96.6% against a weighted cost of capital of 15.7%, and net cash, with net debt to EBITDA of -0.06. The weakest are the revenue decline over five years (-5.3% a year), the free cash flow conversion of 42.8% on a trailing twelve-month basis, and the share count, which has risen at 4.4% a year over five years. The case depends on the company sustaining the recent earnings growth that the market is pricing in.

Financial health

Green: the balance sheet is strong, with the current ratio at 1.43, net debt to EBITDA at -0.06, debt to equity at 0.08 and interest coverage at 83.7, all assessed as good. The quick ratio is 0.87. The Altman Z-score is 16.27, in the safe zone; the model was designed for manufacturers, which fits this business. Insolvency risk: low, about 0.01% by the estimate of the Ohlson model over one to two years. The company does not report its interest expense in a way that reduces the coverage reading, so the coverage figure is taken as given.

Earnings quality

Red: free cash flow conversion is the main weakness, at 42.8% on a trailing twelve-month basis and 34.5% over five years, both assessed as bad for the five-year figure. The accrual ratio is 39.4%, meaning reported earnings run well ahead of cash generation. Stock-based compensation is 1.6% of revenue, and free cash flow after it is 4.06 billion USD. The share count has grown at 4.4% a year over five years, which means dilution rather than buybacks. The Piotroski score is 6 of 8 evaluable tests passed. The Beneish M-score is not available. The company beat earnings estimates in 7 of the last 8 quarters, with an average surprise of 11.5%. Estimates for the current year have risen 34.0% over 90 days with no downward revisions in the last 30 days.

Profitability

Green: the gross margin is 52.6% against a ten-year median of 29.7%, the operating margin is 39.8% against a median of 8.7%, and the net margin is 69.2% against a median of 2.7%. The operating margin stability measure is 1.37. Return on invested capital is 96.6% against a weighted cost of capital of 15.7%, a given ROIC minus WACC value of 81.0%, and the five-year median return on invested capital is 13.9%. Return on equity is 107.2%, but the DuPont split shows this is driven mainly by a net margin of 73.0% and an asset turnover of 0.93, with leverage contributing a multiplier of only 1.56. The 4.9% tax rate also lifts the net margin, so the profitability is strong but partly reflects a low tax charge.

Growth

Yellow: revenue compound growth is 27.4% over three years, but -5.3% over five years and -0.1% over ten years. Revenue grew in 8 of the 10 comparable years. Earnings per share compound at 56.1% over five years and 37.8% over ten years. Free cash flow per share compounds at 25.9% over five years and 4.7% over ten years. The five-year decline in revenue sits against the recent three-year rebound, so the growth record depends heavily on the period chosen. Next year's earnings estimate implies growth of 63.4%, with 2 upward and 1 downward revisions in the last 30 days.

Valuation

Red: the price is well above what the company's cash generation and historical multiples support. The price-to-earnings ratio is 9.85, an earnings yield of 10.2%, and the free cash flow yield is 4.3%. Against ten-year medians, the price-to-book premium is 693.6%, the price-to-sales premium is 607.2%, and the price-to-free-cash-flow premium is 47.1%. The discounted cash flow gives 74.56 USD per share at a discount rate of 15.7%, with zero near-term growth and 2.5% terminal growth. The fair value from historical multiples is 179.36 USD. The fair value band of 101.57 to 152.35 USD is an order-of-magnitude estimate built on fixed assumptions, not a price target. The reverse discounted cash flow implies 20.6% growth against 25.9% free cash flow per share growth over five years. The dividend yield is 0.2% and the payout on free cash flow is 4.7%.

Risks

Each weak number is a risk. Free cash flow conversion of 42.8% means a large share of reported profit is not yet cash, so a fall in conversion would weaken the case for the current multiples. Revenue has declined over five years at -5.3% a year; if that trend resumed, the 20.6% growth implied by the price would be hard to reach. Dilution of 4.4% a year reduces the return per share for existing holders. The beta of 2.17 means the share price is highly sensitive to the market, and the risk-free rate of 4.87% affects the discount rate. The Beneish M-score is not available, so manipulation risk cannot be assessed from this data. This analysis does not include a debt maturity schedule or revenue by segment, so refinancing risk and the contribution of individual products cannot be judged.