Western Digital is rated Outperform with a $650 target despite shares falling after revenue rose more than 50%, as AI-spending worries outweigh the strong quarter. A 20% hard-drive supply shortage versus demand should last until 2028 and possibly the decade's end, with HDD risk extending to 2029, supporting pricing power, faster price rises, cash generation, buybacks and higher share value; cloud renegotiations (70-80% of business) could lift margins. WDC cannot control customer demand, and new NAND supply in 2028 is the first risk.

With the memory industry still under pressure, we want to focus on Western Digital. Those stocks are under pressure following their quarterly results, even though they were better than expected.

Revenues increased by more than 50%. They exceeded expectations. The outlook didn't look bad to me. Yes, no, those were fantastic numbers. If they had given us these figures for the last quarter, with this output growth, this pricing, and exceeding the guidance, I think the expectations were $5 billion and gross profit margins of 60%, and they exceeded both.

I think the stock would have gone up by double digits, but if you're worried about what's going to happen with AI spending next year, they can't really talk about that.

You have an "Outperform" rating and a $650 price target for this stock. This is from your new memo issued today. She says that the industry's concerns outweigh the impressive results at the moment.

I think there is a shortage of hard drives. It is something that the industry cannot mitigate. It takes two to three years to launch a disc head factory. It takes another year to manufacture a disc from those new heads.

Therefore, we are looking at a sector that is experiencing a 20% shortage of supply compared to demand.

I think prices will likely continue to rise at a better pace than I estimated, and I think these numbers will continue to climb as disc companies continue to generate tons of cash and repurchase lots of shares, and the stocks will eventually react appropriately.

Yes, I definitely think it's still a cyclical industry. I believe again that supply usually and most of the time drives the economic cycle. Therefore, a shortage of supply is what creates upward cycles.

Excess production capacity entering the market is what leads to downward cycles. No one simply wants to bear the costs of consumption. In this case, because these companies had not been investing post-Covid, partly because the industry had been performing poorly for a while, they do not have the capital needed to increase supply.

Therefore, we expect a supply deficit to be certain until 2028, and possibly until the end of the decade. I believe that during that period they will generate a lot of cash, they will repurchase a lot of shares, and the value of their shares will increase.

Western Digital can only tell you what it sees in this quarter or the next, and what it expects for customer demand in the distant years, but it does not have control over customer demand.

Building a factory for reading and writing heads takes two to three years. If there is any risk outside the scope of hard drives in terms of supply, it is memory. All these customers can choose between purchasing solid-state drives (SSDs) or hard disk drives to a certain extent.

If you think about NAND memory, there are no new factories that will actually come online until 2028. From my point of view, the first potential danger from the supply side may emerge in 2028 when we see those new NAND factories.

From the perspective of hard drives, it actually extends to 2029 and beyond. Therefore, during that period, I believe these companies will have pricing power.

One point to note is that while prices are rising, they have not yet risen at the same rate for their major customers, the cloud service providers, who make up 70-80% of their business.

I also expect that when renegotiating the next batch of agreements with these clients, there will be room to significantly raise prices for these clients, which may create another qualitative leap in profit margins and revenues for these companies.