Even though the supply chain crisis and the semiconductor chip shortage are curbing the computer hardware industry’s growth, the industry’s prospects look bright. The demand for computer hardware has been increasing, with companies rearranging their operations to make hybrid working a permanent feature. Moreover, amid rapid digital transformation, the adoption of advanced technologies such as the internet of things (IoT), artificial intelligence (AI), and cloud-based services is expected to rise, leading to a growing need for computer hardware. According to Globe Newswire, the global computer hardware market is expected to grow at a CAGR of 6% by 2025. Therefore, both Western Digital Corp. (WDC) and Seagate Technology Holdings (STX) should benefit. 

WDC develops, manufactures, and sells data storage devices and solutions. It offers client devices, including hard disk drives and solid-state drives for computing devices. STX provides global data storage technology and solutions. It offers hard disk and solid-state drives.

STX has gained 20.2% over the past three months, while WDC has had negative returns. Which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On December 10, 2021, WDC announced closing its underwritten public offering of $500 million aggregate principal amount of 2.85% senior unsecured notes due 2029 and $500 million aggregate principal amount of 3.10% senior unsecured notes due 2032. WDC’s CFO Bob Eulau said, "Our strong cash flow generation and our commitment to paying down debt have enabled Western Digital to deliver our balance sheet."

On December 14, 2021, STX announced the new Exos Application Platform with a new controller featuring 2nd Gen AMD EPYC processors. Ken Claffey, senior vice president, Systems at STX, said, "The new Exos AP with AMD EPYC processors can help IT professionals build a cost-effective data management strategy that intelligently captures, stores, and analyzes data today and leverages it in the future to drive success."

Recent Financial Results

WDC’s net revenue increased 23% year-over-year to $4.83 billion for the fiscal second quarter ended December 31, 2021. The company’s operating income grew 360% year-over-year to $727 million, while its net income came in at $564 million, representing an 810% year-over-year increase. Also, its EPS came in at $1.79, up 795% year-over-year.

STX’s revenues increased 18.8% year-over-year to $3.12 billion for the fiscal second quarter ended December 31, 2021. The company’s income from operations grew 66.7% year-over-year to $580 million, while its net income came in at $501 million, representing a 78.9% year-over-year increase. Also, its EPS came in at $2.23, up 99.1% year-over-year.

Past and Expected Financial Performance

WDC’s net income and EPS grew at CAGRs of 33.3% and 32.4%, respectively, over the past three years. Analysts expect WDC’s revenue to increase 10.1% for the quarter ending March 31, 2022, and 13.1% in fiscal 2022. The company’s EPS is expected to grow 64.3% for the quarter ending March 31, 2022, and 79.3% in fiscal 2022. Moreover, its EPS is expected to grow at a rate of 20% per annum over the next five years.

On the other hand, STX’s net income and EPS grew at CAGRs of 3.1% and 11.3%, respectively, over the past three years. The company’s revenue is expected to increase 6.8% for the quarter ending March 31, 2022, and 13.3% in fiscal 2022. Its EPS is expected to grow 37.8% for the quarter ending March 31, 2022, and 59% in fiscal 2022. Also, STX’s EPS is expected to grow at a rate of 25% per annum over the next five years.

Profitability

WDC’s trailing-12-month revenue is 1.58 times what STX generates. However, STX is more profitable with an EBITDA margin and net income margin of 20.71% and 15.35% compared to WDC’s 17.82% and 10.52%, respectively.

Furthermore, STX’s ROE, ROA, and ROTC of 242.48%, 14.07%, and 20.46% are higher than WDC’s 18.25%, 5.77%, and 7.70%, respectively.

Valuation

In terms of forward non-GAAP P/E, STX is currently trading at 12.04x, 87% higher than WDC’s 6.44x. Moreover, STX’s forward EV/EBITDA ratio of 10.09x is 99.4% higher than WDC’s 5.06x.

So, WDC is relatively affordable here.

POWR Ratings

WDC has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. On the other hand, STX has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

WDC has an A grade for Growth, consistent with analysts’ expectations that its EPS and revenue will increase significantly in the upcoming months. On the other hand, STX has a C grade for Growth, in sync with analysts’ expectations that its EPS and revenue will grow moderately in the near term.

Also, WDC has a B grade for Value, consistent with its forward P/B of 1.32x, 75.6% lower than the industry average of 5.41x. However, STX has a C grade for Value, in sync with its forward P/B of 37.51x, 593.7% higher than the industry average of 5.41x.

Of the 46 stocks in the Technology - Hardware industry, WDC is ranked #16. In comparison, STX is ranked #19.

Beyond what I’ve stated above, we have also rated the stocks for Momentum, Quality, Stability, and Sentiment. Click here to view all the WDC ratings. Also, get all the STX ratings here.

The Winner

The computer hardware industry is expected to grow exponentially as the industry participants help facilitate the new working trends. While WDC and STX are expected to gain, I believe it is better to bet on WDC now because of its robust financials, lower valuation, and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Technology - Hardware industry here.

STX shares were trading at $108.95 per share on Thursday afternoon, down $1.44 (-1.30%). Year-to-date, STX has declined -3.57%, versus a -5.67% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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