Western Digital Stock Has Fallen 53% Since June. I'd Consider a Small Position After Its Latest Report.

Western Digital (NASDAQ:WDC) gave investors almost everything they could've asked for on Thursday. The hard drive maker's revenue in its fiscal first quarter of 2027 (the period ending Oct. 2, 2026) jumped 55% year over year to $4.38 billion. The company also boosted its dividend 17%, and its non-GAAP (adjusted) earnings per share climbed 161%. The revenue number beat the $4.0 billion to $4.2 billion range management had guided for in August.

But shares haven't seen much of a lift. At roughly $353 as of this writing, the stock is worth less than half what it was at its June 18 record close of about $746 -- a drop of about 53%.

Has the stock fallen far enough to make it a buy? I think the answer has less to do with the quarter itself and more to do with how long hard drive prices can keep rising.

Image source: The Motley Fool.

Pricing is still speeding up

Showing how tight the market for data storage remains, Western Digital's average price per terabyte rose 28% year over year in fiscal Q1, up from growth in the high teens in the previous quarter. Exabytes shipped (a measure of all the storage capacity sold) rose 22%, and management expects this growth to pick up as new, higher-capacity drives ramp up over the next year or so.

More storage sold at higher prices is why revenue growth keeps accelerating, from 44% in the prior quarter to 55% in fiscal Q1.

Management's guidance for the fiscal second quarter calls for even faster growth of 66% to 72%, or around $5.1 billion in revenue at the midpoint. Margins are widening, too. Adjusted gross margin rose to 58.1% in fiscal Q1, up from 54.4% in the prior quarter and 43.9% a year ago, and management expects 60% to 61% in fiscal Q2.

Also, free cash flow more than doubled year over year to $1.38 billion, and much of it went back to shareholders. Western Digital repurchased around $1 billion of its stock in the quarter and boosted its quarterly dividend to $0.175 a share.

Why have shares fallen so far?

The slide seems to reflect worry over where hard drive pricing heads next, not the current results. Prices of any storage product can swing sharply when supply catches up to demand.

Shares fell around 10% on Oct. 2 after a report that Toshiba plans to double its capacity to build hard drives for artificial intelligence data centers.

Additionally, when Western Digital reported its fiscal fourth quarter in August, the stock slid around 13% the next day despite 44% revenue growth.

Management pushed back on Thursday's earnings call. CEO Irving Tan said the company has good demand visibility through 2030 and 2031 for its top seven customers. CFO Kris Sennesael said there's "definitely further room" for price-per-terabyte growth in the next three to four quarters. But he also noted that the growth in price per terabyte would probably slow a bit eventually, and that the further out you look, the less of Western Digital's business is covered by pricing terms in its long-term agreements.

Put simply, the company can see demand for years ahead. It can't see the price it'll get for that demand nearly as far out.

Earnings are outrunning the stock

That uncertainty helps explain why the valuation looks so modest. Shares cost around 27 times adjusted earnings over the past four quarters. But annualize the $5.80 midpoint of management's fiscal second-quarter adjusted earnings-per-share guidance, and the price-to-earnings ratio drops to around 15.

For a company whose adjusted earnings per share more than doubled last quarter, a price-to-earnings multiple of 15 is low. Investors seem to expect today's profits to fade.

Of course, some fade is reasonable to expect. Price per terabyte likely won't keep rising 28% a year forever, and more supply from a rival is one way a pricing boom might end.

In early September, I favored Seagate Technology over Western Digital, mostly because Western Digital hadn't shown how much of its demand past this year was locked in. Thursday's call answered some of that, on demand if not on price. And the stock's more than $100 lower than it was then.

So, is Western Digital stock a buy after its latest report? At around 15 times annualized guided earnings, I think much of the risk of a pricing slowdown is already built into the share price. I'd consider opening a small position here, and I'd want to see price per terabyte keep rising into 2027 before buying more.

The main risk is that hard drive pricing turns earlier than management expects.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Western Digital. The Motley Fool has a disclosure policy.