Western Digital Net Profit Surges 12-Fold Yet Stock Still Falls 12%

TradingKey - The continuous expansion of AI data centers is driving the storage industry into a new upcycle. Benefiting from robust demand for enterprise hard drives, Western Digital ( WDC) delivered a near-flawless quarterly earnings report.

Revenue, profitability, and margins all improved significantly, with net profit surging more than 12-fold year-over-year, indicating that the storage industry's recovery continues to gain momentum.

For the fourth fiscal quarter ended July 3, 2026, the company reported revenue of $3.747 billion, up 44% year-over-year, higher than market expectations of approximately $3.68 billion; adjusted earnings per share (Non-GAAP EPS) was $3.56, also beating analysts' consensus estimate of $3.31.

The improvement in profitability was even more pronounced. On a GAAP basis, the company's net profit for the quarter reached $3.195 billion, up more than 12-fold from $243 million in the same period last year; excluding one-time items, adjusted net profit was $1.382 billion, up 130% year-over-year.

However, the stellar earnings report failed to boost the stock price, with Western Digital's shares tumbling nearly 12% in after-hours trading.

Source: Google Finance

Next-Quarter Guidance Raised Further but Falls Short of Market’s Highest Expectations

Looking ahead to the first quarter of fiscal 2027, Western Digital expects revenue to be between $4 billion and $4.2 billion, with a midpoint of approximately $4.1 billion, higher than the market consensus estimate of $4.04 billion; adjusted earnings per share are expected to be $3.85 to $4.15, with a midpoint of around $4, which also exceeds the general market forecast of around $3.80; non-GAAP gross margin is expected to be 55% to 56%, continuing to exceed market expectations.

Judging by the numbers, the company's financial outlook remains robust, indicating that AI data center construction continues to drive growth in enterprise storage demand.

Company CEO Irving Tan stated that as global data continues to grow rapidly, the company remains optimistic about demand resilience and business prospects for fiscal 2027.

Chief Financial Officer Kris Sennesael also pointed out that the continuous expansion of cloud computing, AI training, and data-intensive applications will continue to support improvements in margins and free cash flow.

However, this guidance was still not enough to satisfy market expectations that had already been significantly elevated.

Previously, multiple institutions had already fully anticipated rising enterprise hard drive prices, the continuous expansion of cloud capital expenditures, and long-term demand driven by AI, with some investors even betting that the company would provide a more aggressive growth outlook. Therefore, when the latest guidance only 'slightly beat expectations', the market chose to take profits on the earnings release, which also put clear pressure on the stock price in after-hours trading.

AI Data Growth Fuels Full-Year Performance Recovery

Western Digital and Seagate ( STX) currently dominate the global hard disk drive (HDD) market. Compared with flash memory, high-capacity HDDs are more advantageous in terms of per-unit storage cost, and therefore remain a crucial infrastructure for cloud computing companies to store massive amounts of data.

With the rapid development of AI model training, inference, agents, and physical AI applications, the volume of data generation continues to grow. Hyperscale cloud service providers not only need GPUs and high-speed memory, but also require a large volume of nearline hard drives for long-term storage of training data, model parameters, video, and sensor information. This makes Western Digital one of the primary beneficiaries of AI data center expansion.

For the full fiscal year 2026, Western Digital's revenue reached $12.919 billion, up 36% year-over-year; GAAP gross margin rose from 38.8% to 48.9%, and operating income grew 91% to $4.453 billion.

Full-year GAAP net income attributable to common shareholders reached $9.298 billion, up 481% year-over-year; adjusted net income was $3.883 billion, up 120% year-over-year. Adjusted operating income grew 107% to $4.817 billion, indicating that improved product pricing and an increased share of high-value enterprise hard drives are unlocking stronger operating leverage.

Cash flow also improved in tandem. Western Digital's full-year operating cash flow reached $3.929 billion, and free cash flow reached $3.511 billion. CEO Irving Tan stated that as global data generation continues to accelerate, the company remains confident in the sustainability of demand and visibility into the business outlook as it enters fiscal year 2027.

Why Western Digital Shares Slumped After Earnings?

Western Digital's stock price has surged over 200% year-to-date, as the market had already priced in most of the tailwinds from AI storage demand, rising HDD prices, and margin expansion. Consequently, financial results that merely "beat consensus" are no longer sufficient to sustain further stock price appreciation.

Rival Seagate's previously announced outlook had also raised the bar. Seagate expects next-quarter revenue to be $4.0 billion to $4.2 billion, significantly higher than the $3.78 billion predicted by analysts; adjusted EPS is expected to be $7.10 to $7.50, also far exceeding the market expectation of $5.85. In contrast, while Western Digital's guidance was above consensus, the level of surprise was significantly lower.

Meanwhile, investors are still evaluating whether large tech companies' AI capital expenditures can sustain high-speed growth in the long run. Although hyperscale cloud providers are currently still expanding data center investments, if the return on AI investment falls short of expectations, the growth rate of future server and storage procurement could slow down.

The consumer market is also a potential risk. Rising storage product prices could lengthen the replacement cycles for PCs and consumer electronics, dampening demand for consumer-grade hard drives and thereby offsetting some of the growth in the data center business.

In addition, Western Digital's stock price has already fallen by about 15% in July and has pulled back nearly 40% from its June peak, indicating that the market has become increasingly cautious toward high-valuation AI infrastructure stocks.

Goldman Sachs ( GS) believes that Western Digital delivered a strong performance in fourth-quarter gross margin and EPS, but its first-quarter revenue guidance was largely in line with its forecasts, failing to provide a significant upside surprise. The firm continues to rate Western Digital as "Neutral" and maintains its 12-month target price of $650.