Computer hard-drive manufacturer Western Digital (WDC -10.95%) stock tumbled 11.7% through 1 p.m. ET Friday — but not for any fault of its own.
Instead, investors seem to be selling off Western Digital stock amid reports that rival Toshiba — currently the No. 3 producer of hard disk drives worldwide — is expanding its production capacity to grab more market share.
Presumably, including market share that belongs to Western Digital.
Image source: Getty Images.
What’s Toshiba up to today?
As Nikkei reports, Toshiba will spend $400 million on capital expansion to double its HDD production capacity by fiscal 2027. Investment will center on Toshiba’s factories in the Philippines, and will target the high-growth market for hard-disk storage supporting artificial intelligence services.
Western Digital investors appear to be panicking at the prospect — but should they?
The global market for hard drives currently has just three major players. Western Digital and Seagate Technology (STX -11.76%) each hold 40% or more of the market, while Toshiba’s share is around 17%. Doubling production, therefore, might take Toshiba to 30% or a little better.
Depending on who loses market share to Toshiba, and how much, this has the potential to vault Toshiba from third to second place.
Today’s Change
(-10.95%) $-50.64
Current Price
$411.92
Key Data Points
Market Cap
Day’s Range
$396.57 – $427.71
52wk Range
$112.52 – $799.87
Volume
17.6M
Avg Vol
7.2M
Gross Margin
48.83%
Dividend Yield
0.12%
Should Western Digital investors worry?
Beyond bragging rights, Toshiba’s move poses a second threat to Western Digital: Price competition — and falling profits.
Toshiba’s going to want to ensure it has enough sales to justify its increased production, and one way to make that happen is by underpricing WD and Seagate. Western Digital would presumably need to cut its prices to match, thereby shrinking its profit margin and putting its projected 68% annual earnings growth rate at risk.
The good news: at a valuation under 18x earnings, Western Digital stock already has a significant margin of safety built in. While the risk from Toshiba is real, I think today’s sell-off is an overreaction.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Western Digital. The Motley Fool has a disclosure policy.
