Western Digital: Price increases drive an earnings beat, but why has expansion spending not shaken JPMorgan’s view?
Faster growth in the price per TB drove Western Digital’s first fiscal quarter revenue and margins above expectations, while its second-quarter guidance also exceeded consensus. JPMorgan raised its earnings forecasts and price target, citing a return to growth in shipped capacity and the focus of new investment on heads, platters and technology transitions.
Original source：J.P. MorganFirst published on Unhidea：Original source date：
Key takeaway
JPMorgan believes higher prices and accelerating growth in shipped capacity will continue to amplify profits, while increased capital spending is primarily intended to raise capacity per platter. Slower near-term cost reductions remain a constraint on margin improvement.
First-quarter results beat expectations: was pricing or volume the main driver?
In the first quarter of fiscal 2027, ending in September 2026, Western Digital reported revenue of 4.38 billion dollars, up 55% year over year and above the market consensus of 4.15 billion dollars and the top end of the company’s guidance of 4.2 billion dollars. Pricing was the main reason for the beat: the average price per TB rose 28% year over year, accelerating further from 18% in the previous quarter.
Over the same period, total shipped capacity of nearline hard drives rose 22% year over year, while cost per TB fell 4%; both were broadly in line with JPMorgan’s expectations. Higher prices pushed gross margin to 58.1%, above the consensus of 55.9%; combined with operating leverage, this brought earnings per share to 4.64 dollars, above the consensus of 4.10 dollars.
How much did second-quarter guidance lift earnings expectations?
For the second fiscal quarter ending in December 2026, the company guided for revenue of 5 billion–5.2 billion dollars. The midpoint implies year-over-year growth of 69% and exceeds JPMorgan’s previous estimate of 4.5 billion dollars and the market consensus of 4.6 billion dollars.
Gross margin guidance rose to 60%–61%, compared with the market consensus of 58%; earnings-per-share guidance was 5.60–6.00 dollars, versus consensus of 4.82 dollars. At the guidance midpoint, operating margin reaches 52.6%, indicating that margins are rising as revenue increases.
How will shipped capacity sustain growth, and what constrains cost reductions?
Management reiterated that year-over-year growth in total shipped capacity will return to above 25% by the third quarter of fiscal 2027. Product transitions are a key support: 40 TB ePMR drives are expected to account for 30% and 50% of total nearline shipped capacity in the second and third fiscal quarters, respectively, followed by the introduction of HAMR drives in the first half of 2027.
Higher-capacity products help increase the storage capacity delivered, but technology transitions and rising investment costs also constrain near-term cost reductions. Management hopes to restore the reduction in cost per TB to 10% through higher areal density and value engineering; the actual reduction is currently only 4%, leaving margin improvement more dependent on pricing for now.
Why has higher capital spending not changed the supply-and-demand assessment?
Over the next two years, capital spending as a proportion of revenue is expected to exceed the previous range of 4%–6%. The demand outlook is based on customers including hyperscale cloud providers and emerging cloud service providers, whose demand signals point to growth in shipped capacity of more than 25% over the next decade.
The company stressed that investment is directed mainly toward manufacturing heads and platters to address HAMR’s longer production cycle and the greater number of platters per drive, rather than expanding the number of complete drives manufactured. On that basis, JPMorgan believes the company can increase capacity output while limiting additional fixed assembly costs, and that industry expansion discipline can continue to support pricing.
What did JPMorgan raise, and what conditions does its view depend on?
JPMorgan raised its earnings-per-share forecasts for fiscal 2027 and 2028 from 21.45 and 35.15 dollars to 25.65 and 41.10 dollars, respectively. It maintained its “Overweight” rating and raised its December 2027 price target from 600 dollars to 650 dollars. The revisions reflect stronger assumptions for shipped capacity and price per TB, partly offset by slower near-term cost reductions.
This earnings trajectory depends on continued cloud-provider investment in AI infrastructure and the cost competitiveness of hard drives. If cloud capital spending slows, growth in capacity demand will come under pressure; a faster narrowing of the cost gap between hard drives and flash memory, or faster progress in flash density, would also challenge the bank’s demand assessment.
