Analysts Say Data Storage Stocks Like WDC Are Set to Make a Turnaround

Memory and storage stocks plunged from their highs this year after the momentum broke. Semiconductor stocks also took a turn in the wrong direction, although certain names now seem to be preparing for a turnaround as analysts remain bullish. Western Digital (WDC) is one of these names. WDC stock fell more than 45% from its June high before several analysts started piling in with bullish price targets right before shares started recovering.

Wedbush analyst Matt Bryson recently raised his Western Digital price target to $650 from $540 and reiterated an “Outperform” rating. Bryson did the same for Seagate Technology (STX), lifting his STX price target to $1,000 from $825. Initially, this looked like an ill-timed call as both stocks fell the same day. However, the broader industry is now staging a turnaround, with many analysts confident that the momentum is returning.

Analysts Aren't Giving Up

Plenty of retail investors exited DRAM and NAND stocks in the past few weeks after deciding the rally was finished. Analysts, who were rather conservative with their price targets a year or two ago, are now the ones expecting more action.

According to Barchart data, the highest price target for WDC stock is $1,050, with the average price target at nearly $642 per share. Investors should obviously consider the higher price target to be premature, but the average price target is within reach and implies potential upside of 18% from here.

The price target raise from Wedbush was an outlier just a few days ago, but now it is a mid-pack call that is close to the consensus.

Not a Turnaround Yet

Western Digital, Seagate, and Sandisk (SNDK) are yet to break above their one-month highs. July marked a significant turning point where memory stocks started declining more rapidly, although shares underwent a brief recovery in mid-July.

However, that turned out to be a false recovery, with some of these stocks falling to fresh lows. These are the lows the current bounce is from, and the bounce is still below the mid-July peak. We are still in a descending pattern, so it may just be a repeat of what happened this past month.

With that in mind, I would only put more money into stocks like WDC, STX, and SNDK if you can see them make another 10% move upward. For WDC stock, I would be careful below $600, even if you are not a tactical investor. The stock is high-volume, and most retail investors here are not looking at it as a long-term investment.

If the Metrics Are Looking Up, Why Isn't the Stock?

For the third quarter, Western Digital posted $3.34 billion in sales, up 45% year-over-year (YOY) and 11% sequentially, with a 35.7% operating margin. The free cash flow margin was 29.3%, with free cash flow amounting to $978 million.

Western Digital's trailing free cash flow sits at $2.9 billion, which means WDC stock currently trades at about 64.7 times free cash flow. Thus, the stock did go up, but did so very early on in an aggressive way. If anything, I would argue that WDC stock is overvalued if you look at free cash flow.

Where I See WDC Stock

Even though analysts are bullish and WDC stock could make another move higher if the broader market permits, I believe the euphoric phase is over. In my view, it would make more sense for Western Digital stock to cool off or at least trade sideways until its valuations seem sensible.

That's what Nvidia (NVDA) and Palantir (PLTR) have been doing over the past year. It's only a matter of time until storage and memory stocks do the same.