Evercore ISI: Western Digital capital spending rises to about 8% of revenue: More funds directed toward increasing hard drive capacity

How much will capital spending increase?

Western Digital management expects capital spending over the next two years to approach 8% of revenue, above its long-term framework of 4%–6%. Spending has already begun to rise: in the quarter ending September 2026, it was 227 million dollars, or 5.2% of revenue, compared with approximately 3.2% over the previous trailing four quarters.
Based on Evercore ISI’s estimated revenue of approximately 21 billion dollars and 31 billion dollars for fiscal years 2027 and 2028, respectively, and a capital spending ratio of 8%, investment would be approximately 1.68 billion dollars and 2.52 billion dollars in the respective years, totaling approximately 4.2 billion dollars.

Evercore ISI believes the investment is focused on increasing recording density and storage capacity output measured in EB, rather than broadly expanding production capacity for hard drive units. Western Digital plans to add heads and platters and increase production of HAMR drives to raise capacity shipments.
New technology is also increasing investment intensity: HAMR has a longer manufacturing cycle, while HAMR lasers and additional heads and platters add complexity. The firm assumes capital spending of approximately 3.02 million dollars for each additional 1 EB of annual capacity, about 30% higher than the previous year.

The firm assumes only half the spending will add EB capacity, with the rest used for equipment replacement, production line conversion and offsetting HAMR’s slower production speed. Under these conditions, once fully ramped, investments in fiscal years 2027 and 2028 could support approximately 278 EB and 416 EB, respectively, in additional annual shipments.
The firm estimates a cash payback period of about three years. Key assumptions include unchanged revenue per EB, an incremental gross margin of 70% and a five-year depreciation period for new equipment, with operating expenses and working capital investment also included.

Western Digital says it has visibility into demand from its seven largest customers through 2030–2031. Evercore ISI believes the demand visibility provided by multiyear, long-term customer agreements matches its estimated investment payback period.
Prices also provide support: in the latest quarter, year-on-year growth in the blended average selling price per TB accelerated from the high teens previously to 28%; the firm believes there is room for further acceleration over the next three to four quarters.
However, investment payback depends on demand and supply discipline. If large cloud customers slow their capital spending, nearline hard drive demand and revenue could come under pressure; if hard drive manufacturers expand capacity, the supply-demand balance could also change.