Key Points
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Western Digital management noted earlier this year that it had sold out its 2026 storage capacity.
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The company is now entering into long-term supply agreements, indicating that demand for its storage products will remain robust.
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Western Digital’s attractive valuation and healthy earnings growth prospects suggest that the stock can skyrocket despite its multibagger performance over the past year.
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Artificial intelligence (AI) data centers require substantial storage capacity, which isn’t surprising, as they must train large language models (LLMs) with billions or trillions of parameters using enormous amounts of data.
Also, running inference applications means that data centers need to be ready with massive data sets to fall back upon and answer user queries. Not surprisingly, AI data centers have been cornering the global storage supply, creating a major shortage of hard-disk drives (HDDs) and NAND flash-based solid-state drives (SSDs).
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Micron Technology and Sandisk have been the major beneficiaries of the booming demand for storage solutions in AI data centers. Both semiconductor stocks have been enjoying healthy growth in revenue and earnings, driven by the solid demand for their NAND flash storage chips. However, there is another company that sells data storage devices and has clocked outstanding gains of 465% over the past year.
I am talking about Western Digital (NASDAQ:WDC), which has been experiencing outstanding growth in revenue and earnings, and trades at an attractive valuation right now.
We will take a closer look at Western Digital’s prospects in this article and check why this data storage company can soar even higher following its red-hot rally over the past year.
Image source: Getty Images.
Western Digital’s terrific growth is sustainable
Western Digital released its fiscal 2026 fourth-quarter results (for the period ended July 3) on Aug. 5. The company’s revenue increased 36% during the year to $12.9 billion. Meanwhile, the favorable demand-supply dynamics in the storage industry boosted Western Digital’s margins. Its non-GAAP operating margin increased by almost 13 percentage points in fiscal 2026 to 37.3%.
As a result, the company’s adjusted earnings per share increased by 104% last year to $10.22. The good news for Western Digital investors is that its growth rate is poised to get better. The company anticipates $4.1 billion in revenue in the current quarter at the midpoint of its guidance range, which would be a 45% increase over the year-ago period.
The non-GAAP earnings per share guidance of $4.00 indicates a year-over-year increase of 125%. More importantly, Western Digital can sustain such impressive growth levels beyond the current quarter. The company noted in February that it had already sold out its HDD capacity for 2026. And now, management noted on the Augustearnings callthat it is discussing long-term supply agreements with customers for 2029, 2030, and even 2031.
This suggests that customers are looking to secure long-term storage supply to support the build-out of AI data centers. Meanwhile, the favorable pricing environment fueling Western Digital’s bottom-line growth also seems sustainable. Morgan Stanley estimates that the HDD supply cycle will lengthen, at least through 2028. So, there is a good chance that supply constraints will worsen, enabling Western Digital to capitalize on further price increases.
The investment bank adds that annual HDD demand growth of 40%-50% is outpacing the 30%-35% annual increase in supply. As a result, the price per terabyte for high-capacity nearline storage drives deployed in data centers could jump from around $15 currently to $25-$30 within the next three years.
So, it is easy to see why analysts expect this tech company to deliver solid earnings growth.
WDC EPS Estimates for Current Fiscal Year data by YCharts
The stock’s valuation suggests that it is primed for a big jump
The chart above shows us that analysts expect Western Digital’s earnings to jump by nearly 4.5x between fiscal 2026 and fiscal 2029. However, Morgan Stanley analysts are even more ambitious, predicting that Western Digital’s earnings per share could jump by 10x between 2025 and 2028.
But even if Western Digital’s earnings grow in line with consensus estimates to $44.83 per share in three years, this AI stock could jump to $1,165 (assuming it trades in line with the Nasdaq-100 index’s forward earnings multiple of 26 at that time). That’s 165% higher than Western Digital’s current stock price.
Another point worth noting is that Western Digital is trading at just 17 times earnings. This makes this tech stock a no-brainer buy, especially given its phenomenal earnings growth potential, which could lead to a premium valuation in the long run and help it deliver much bigger gains than I have assumed above.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology and Western Digital. The Motley Fool has a disclosure policy.
