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Can Western Digital Sustain Margin Gains Amid Rising Competition?
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Key Takeaways
Western Digital's non-GAAP gross margin rose to 39.4% in fiscal 2025, with operating income up 578%.
Spinning off SanDisk and rising nearline demand boosted margins, cash flow and financial strength.
WDC guides Q1 revenue of $2.7B, gross margin of 41-42% and EPS of $1.54 at midpoint.
Western Digital Corporation (WDC - Free Report) has surprised investors with a strong turnaround in profitability over the past year. After struggling through the memory downturn and heavy losses in fiscal 2024, the company has bounced back with sharply higher margins in fiscal 2025. Non-GAAP gross margin surged from 28.7% in fiscal 2024 to 39.4% in fiscal 2025, while operating income skyrocketed 578% to $2,326 million from $343 million. This recovery has been fueled by a cyclical recovery in cloud demand, cost control and a major strategic decision, such as spinning off the SanDisk flash business to become a pure-play hard disk drive (HDD) company. This move has improved its margins, cash flow and overall financial strength. Improving nearline demand, higher AI-driven storage adoption and an uptick in HDD ASP play out as the company’s key catalysts.
HDDs remain the most cost-effective and reliable solution for large-scale storage, with Western Digital holding a strong position in the global market. In the fourth quarter, the company shipped 190 exabytes, up 32% year over year, led by demand for nearline drives and rapid adoption of its 26TB CMR and 32TB UltraSMR products, with shipments doubling to 1.7 million units, marking one of its fastest ramp-ups. Its ePMR and UltraSMR technologies provide reliability, scalability and low Total cost of ownership, while next-generation HAMR drives, now in early hyperscale testing, are on track for qualification in 2027. Next-generation ePMR drives are expected to qualify by early 2026, supporting a smooth transition. Management anticipates continued revenue growth and increased profitability in the next quarter due to rising demand for high-capacity drives.
For the fiscal fourth quarter, Western Digital posted a non-GAAP gross margin of 41.3%, up 610 basis points year over year and above its guidance of 40–41%. The rise in margin reflected a shift toward higher-capacity drives and strong cost discipline across manufacturing and supply chains. Non-GAAP operating expenses fell 16% year over year to $345 million, but came marginally above the guidance due to higher variable compensation tied to better-than-expected performance. Non-GAAP operating income rose 147% year over year to $732 million.
Agentic AI is driving future data growth, while its platform business is gaining traction among native AI firms and SaaS providers. This momentum, combined with strong demand for cloud storage, is fueling expectations for another solid quarter. At the mid-point, Western Digital anticipates non-GAAP revenues of $2.7 billion (+/- $100 million), up 22% year over year. Management projects non-GAAP earnings of $1.54 (+/- 15 cents). It expects non-GAAP gross margin in the range of 41-42%. Non-GAAP operating expenses are expected to be between $370 million and $380 million.
However, stiff competition from other major storage players remains a major concern. Western Digital faces competition from Seagate Technology Holdings plc (STX - Free Report) , Pure Storage, Inc. (PSTG - Free Report) , Hitachi, Samsung and Intel in the storage market and from SSD pureplays such as Micron. Pricing pressure is a persistent threat, as any decline in average selling prices (ASP) could offset shipment growth. The disk drive industry remains highly competitive and vulnerable to supply-demand fluctuations. Additionally, as more device makers shift to flash-based storage solutions, HDD pricing pressure may intensify, potentially weighing on margins.
Taking a Look at Margins of Seagate and Pure Storage
Seagate is a leading provider of data storage technology and infrastructure solutions, with HDDs as its core offering. It also develops SSDs, storage subsystems and provides scalable edge-to-cloud mass data platforms, including data transfer shuttles and storage-as-a-service cloud solutions. In fourth-quarter fiscal 2025, total HDD revenues (93.3% of total revenues) rose 32% year over year, while Systems, SSD & Other (6.7%) grew 2%. Non-GAAP gross margin reached a record 37.9%, rising by about 170 basis points (bps) quarter over quarter and roughly 700 bps year over year, driven by stronger adoption of Seagate's high-capacity nearline products and continued pricing initiatives. For the first quarter of fiscal 2026, the company anticipates revenues of $2.5 billion (+/- $150 million). Non-GAAP operating expenses are expected to be around $290 million. It expects the non-GAAP operating margin to grow in the mid-high 20s percentage range of revenues.
Pure Storage develops all-flash data storage hardware and software products, such as FlashArray and FlashBlade. The company is gaining from rising demand for AI and virtualization storage and strong progress in hyperscale partnerships. The rollout of FlashBlade//EXA and steady adoption of the //E family, supporting AI and HPC workloads, augur well. In the first quarter of fiscal 2026, the company’s non-GAAP gross margin came in at 70.9% compared with 73.9% in the prior-year quarter. The company reported non-GAAP operating income of $82.7 million compared with $100.4 million in the year-ago quarter. For fiscal second quarter, Pure Storage expects revenues to be $845 million, implying an increase of 10.6% from a year ago level. The non-GAAP operating income is expected to be $125 million. The non-GAAP operating margin is projected to be 14.8%.
Image: Bigstock
Can Western Digital Sustain Margin Gains Amid Rising Competition?
Key Takeaways
Western Digital Corporation (WDC - Free Report) has surprised investors with a strong turnaround in profitability over the past year. After struggling through the memory downturn and heavy losses in fiscal 2024, the company has bounced back with sharply higher margins in fiscal 2025. Non-GAAP gross margin surged from 28.7% in fiscal 2024 to 39.4% in fiscal 2025, while operating income skyrocketed 578% to $2,326 million from $343 million. This recovery has been fueled by a cyclical recovery in cloud demand, cost control and a major strategic decision, such as spinning off the SanDisk flash business to become a pure-play hard disk drive (HDD) company. This move has improved its margins, cash flow and overall financial strength. Improving nearline demand, higher AI-driven storage adoption and an uptick in HDD ASP play out as the company’s key catalysts.
HDDs remain the most cost-effective and reliable solution for large-scale storage, with Western Digital holding a strong position in the global market. In the fourth quarter, the company shipped 190 exabytes, up 32% year over year, led by demand for nearline drives and rapid adoption of its 26TB CMR and 32TB UltraSMR products, with shipments doubling to 1.7 million units, marking one of its fastest ramp-ups. Its ePMR and UltraSMR technologies provide reliability, scalability and low Total cost of ownership, while next-generation HAMR drives, now in early hyperscale testing, are on track for qualification in 2027. Next-generation ePMR drives are expected to qualify by early 2026, supporting a smooth transition. Management anticipates continued revenue growth and increased profitability in the next quarter due to rising demand for high-capacity drives.
For the fiscal fourth quarter, Western Digital posted a non-GAAP gross margin of 41.3%, up 610 basis points year over year and above its guidance of 40–41%. The rise in margin reflected a shift toward higher-capacity drives and strong cost discipline across manufacturing and supply chains. Non-GAAP operating expenses fell 16% year over year to $345 million, but came marginally above the guidance due to higher variable compensation tied to better-than-expected performance. Non-GAAP operating income rose 147% year over year to $732 million.
Western Digital Corporation Price and Consensus
Western Digital Corporation price-consensus-chart | Western Digital Corporation Quote
Agentic AI is driving future data growth, while its platform business is gaining traction among native AI firms and SaaS providers. This momentum, combined with strong demand for cloud storage, is fueling expectations for another solid quarter. At the mid-point, Western Digital anticipates non-GAAP revenues of $2.7 billion (+/- $100 million), up 22% year over year. Management projects non-GAAP earnings of $1.54 (+/- 15 cents). It expects non-GAAP gross margin in the range of 41-42%. Non-GAAP operating expenses are expected to be between $370 million and $380 million.
However, stiff competition from other major storage players remains a major concern. Western Digital faces competition from Seagate Technology Holdings plc (STX - Free Report) , Pure Storage, Inc. (PSTG - Free Report) , Hitachi, Samsung and Intel in the storage market and from SSD pureplays such as Micron. Pricing pressure is a persistent threat, as any decline in average selling prices (ASP) could offset shipment growth. The disk drive industry remains highly competitive and vulnerable to supply-demand fluctuations. Additionally, as more device makers shift to flash-based storage solutions, HDD pricing pressure may intensify, potentially weighing on margins.
Taking a Look at Margins of Seagate and Pure Storage
Seagate is a leading provider of data storage technology and infrastructure solutions, with HDDs as its core offering. It also develops SSDs, storage subsystems and provides scalable edge-to-cloud mass data platforms, including data transfer shuttles and storage-as-a-service cloud solutions. In fourth-quarter fiscal 2025, total HDD revenues (93.3% of total revenues) rose 32% year over year, while Systems, SSD & Other (6.7%) grew 2%. Non-GAAP gross margin reached a record 37.9%, rising by about 170 basis points (bps) quarter over quarter and roughly 700 bps year over year, driven by stronger adoption of Seagate's high-capacity nearline products and continued pricing initiatives. For the first quarter of fiscal 2026, the company anticipates revenues of $2.5 billion (+/- $150 million). Non-GAAP operating expenses are expected to be around $290 million. It expects the non-GAAP operating margin to grow in the mid-high 20s percentage range of revenues.
Pure Storage develops all-flash data storage hardware and software products, such as FlashArray and FlashBlade. The company is gaining from rising demand for AI and virtualization storage and strong progress in hyperscale partnerships. The rollout of FlashBlade//EXA and steady adoption of the //E family, supporting AI and HPC workloads, augur well. In the first quarter of fiscal 2026, the company’s non-GAAP gross margin came in at 70.9% compared with 73.9% in the prior-year quarter. The company reported non-GAAP operating income of $82.7 million compared with $100.4 million in the year-ago quarter. For fiscal second quarter, Pure Storage expects revenues to be $845 million, implying an increase of 10.6% from a year ago level. The non-GAAP operating income is expected to be $125 million. The non-GAAP operating margin is projected to be 14.8%.
WDC Price Performance, Valuation and Estimates
In the past year, shares have gained 26.1% against the Zacks Computer-Storage Devices industry’s fall of 7.1%.
Image Source: Zacks Investment Research
In terms of forward price/earnings, WDC’s shares are trading at 12.89X, lower than the industry’s 17.86X.
Image Source: Zacks Investment Research
The Zacks Consensus Estimate for WDC’s earnings for fiscal 2026 has been revised up 14% to $6.50 over the past 60 days.
Image Source: Zacks Investment Research
Currently, Western Digital sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.