Western Digital: With Volume and Prices Rising, Why Is Bank of America Unconcerned About Higher Capital Spending?
The year-over-year increase in price per TB widened to 28%, while visibility into major customers’ demand extends to 2031. Bank of America believes the new investment is primarily intended to increase capacity per drive rather than the number of hard drives; the product transition also limits the scope for near-term cost reductions.
Original source：BofA Global ResearchFirst published on Unhidea：Original source date：
Key takeaway
Bank of America expects Western Digital to expand profitability through price increases and upgrades to higher-capacity products. It believes increased capital spending will help meet capacity demand, but realizing that growth depends on certification and ramp-up of new products and industry pricing.
What changed in volume and pricing?
In the first quarter of fiscal 2027, Western Digital’s price per TB rose 28% year over year, accelerating further from the increase of nearly 20% in the previous quarter. Capacity shipments reached 248 EB, up 7% sequentially and 22% year over year. Revenue growth was supported by both the price per unit of capacity and capacity shipped.
The company’s visibility into demand from its seven largest customers now extends to 2031. Bank of America estimates year-over-year demand growth at nearly 40% and concludes that, without investment in heads and platters, the company’s total available capacity would reach its limit sooner.
Why might higher capital spending not disrupt supply and demand?
Management reiterated that capital spending as a share of revenue in fiscal 2027–2028 will be slightly above the previous range of 4%–6%. The investment will translate into growth in total capacity after about two years, while the supply of hard drives by unit will not increase. This is the key distinction behind Bank of America’s view that concerns about “late-cycle capacity expansion” are overdone.
Most investment is directed toward head wafers: HAMR heads require more processing steps, making additional capacity necessary to maintain output efficiency; future hard drives will also have more platters and heads. The remaining investment goes to glass substrates and dual actuators, so the funds primarily support capacity per drive and product upgrades.
Regarding Toshiba’s capacity expansion, Western Digital’s management believes it is insufficient to materially change industry supply and demand or market-share dynamics. It cites Toshiba’s reliance on third parties for heads and platters, whose production capacity could be a constraint.
How will higher-capacity products sustain growth, and at what cost?
Bank of America expects 40 TB ePMR drives to account for 30% of nearline hard-drive shipments by the end of the second quarter of fiscal 2027 and 50% by the end of the third quarter. The rising share of higher-capacity products is the main basis for the bank’s expectation of faster capacity-shipment growth in the remaining quarters of the fiscal year.
The first generation of HAMR is expected to begin volume shipments in the first half of calendar 2027 after completing certification. Certification for the second generation is planned to begin in the second half, using a configuration of 5 TB per platter and 11 platters per drive. Certification and mass-production progress directly affect the continuity of the capacity upgrade.
The product transition also brings cost constraints: management expects near-term year-over-year cost reductions to be less than 10%. Bank of America still forecasts that full-year gross margin will rise from 49.1% in fiscal 2026 to 61.9% in fiscal 2027; this path to profitability relies more heavily on price increases and an improved product mix.
How much were earnings and cash-flow expectations raised?
Bank of America raised its fiscal 2027 revenue forecast from 19.62 billion dollars to 20.54 billion dollars and its earnings-per-share forecast excluding stock-based compensation from 22.37 dollars to 23.80 dollars. However, its fiscal 2028 earnings-per-share forecast edged down from 40.03 dollars to 39.87 dollars, so longer-term earnings forecasts were not raised in tandem.
Under Bank of America’s model, fiscal 2027 capital spending is 1.358 billion dollars, above 418 million dollars in fiscal 2026; cash outflows from working-capital requirements also rise from 658 million dollars to 2.147 billion dollars. Even so, the bank expects free cash flow to rise from 3.511 billion dollars to 6.01 billion dollars, supporting its assessment of shareholder returns.
The company has raised its quarterly dividend per share by 17% to 0.175 dollars and continues to repurchase shares. Bank of America maintains its buy rating and 800-dollar price target. Its assessment depends on demand continuing to exceed supply and prices continuing to rise; slower cloud and data-center spending, delays in HAMR progress, or weaker industry pricing would undermine that thesis.
