After shooting skyward early in July, Western Digital stock plummeted 12% in response to Q4 earnings last week
Despite reporting 9.5% sales gains last week, pro forma earnings at the hard disk drive-maker plummeted 38%.
Management added insult to injury when it warned investors that the current quarter will look much like the last.
Revenue may come in ahead of guidance, but profits will once more fall short -- which did not much please investors.
At last report, Western Digital stock had given up 17% of its market cap since earnings came out, and according to one analyst, the selling isn't done yet.
This morning, Goldman Sachs announced that even after its 17% price cut, Western Digital stock still isn't cheap enough to own.
Instead, the megabanker advised its clients to sell Western Digital.
According to Goldman, the 17% drop that Western Digital stock suffered last week was only the beginning of the bad news.
In a new report covered on StreetInsider.com just yesterday, Western Digital's next leg down could be just as steep as the last one
and Western Digital stock could fall as far as 16% lower, to crash-land at $38 a share.
Goldman points the finger directly at "NAND margin risk," warning that across the semiconductor industry, companies are growing capital spending by as much as 50% this year,
setting themselves up for systemic oversupply in 2017. Additionally, new developments such as 3D NAND are shaking up the industry and making ordinary NAND obsolete.
"WD is behind Samsung in 3D NAND," warns Goldman, and to fix this, is "trying to ramp quickly, which we believe creates yield risk," in the analyst's estimation.
At the same time, China is rushing to compete on NAND memory, which is contributing both to the capital expenditures explosion, and to the risk of global oversupply
which will hurt profit margins across the board.
Despite its disappointing guidance, Western Digital may benefit in the short term from what Goldman calls "likely tight near-term HDD and NAND supply/demand." But longer term, Goldman believes the real damage is yet to come.
Timing may be everything
So is Goldman Sachs right to tell investors to sell Western Digital stock today? The answer may depend on your time frame. According to the analyst, Western Digital will earn $3 this fiscal year, and at today's share price of just under $45, that works out to a P/E ratio of 15 on the stock.
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