The past six months have been a windfall for Western Digital's shareholders. The company's stock price has jumped 50.5%, hitting $430.84 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Following the strength, is WDC a buy right now? Or is the market overestimating its value? Find out in our full research report, it's free.
Founded in 1970 by a Motorola employee, Western Digital (NASDAQ: WDC) is a leading producer of hard disk drives, SSDs and flash memory.
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It's also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Looking at the trend in its profitability, Western Digital's operating margin rose by 21.7 percentage points over the last five years, showing its efficiency has meaningfully improved. . Its operating margin for the trailing 12 months was 34.5%.
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
As you can see below, Western Digital's margin expanded by 23.1 percentage points over the last five years. This is encouraging, and we can see it became a less capital-intensive business because its free cash flow profitability rose more than its operating profitability. Western Digital's free cash flow margin for the trailing 12 months was 27.2%.
A company's long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Western Digital's demand was weak and its revenue declined by 5.3% per year. This wasn't a great result, but there are still things to like about Western Digital. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions.
Western Digital has huge potential even though it has some open questions, and after the recent surge, the stock trades at 22× forward P/E (or $430.84 per share). Is now the time to buy despite the apparent froth? See for yourself in our in-depth research report, it's free.
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