Equity research firm Summit Insights has cut its rating on Western Digital to Hold, emphasizing the uncertainties connected with the company's planned shift to heat-assisted magnetic recording - HAMR - for its hard disk drive operations.
Summit analyst Kinngai Chan said the transition to HAMR "creates risk," and warned that the migration could produce elevated costs that weigh on gross margins when the new drives start shipping. Chan also projects that the average selling price (ASP) per exabyte will decline in 2027 - the year HAMR drives are expected to begin shipping - after four consecutive quarters of sequential ASP increases.
Chan added that long-term supply contracts with major customers may limit the potential for margin expansion. "We think most of the positives have already been priced into the stock and expect financial outperformance to moderate into 2027," he said.
The Summit downgrade followed Western Digital's most recent quarterly update. The company provided guidance for its fiscal first quarter, forecasting revenue of $4.1 billion, plus or minus $100 million. That midpoint sits slightly above the average analyst estimate of $4.04 billion, according to LSEG data. For adjusted profit, Western Digital guided to $4.00 per share, plus or minus $0.15, which is above the $3.81 consensus estimate.
Despite guidance that topped estimates on both revenue and adjusted earnings per share, the stock moved sharply lower in early trading. Shares fell more than 15% in premarket trading on Thursday after the outlook failed to satisfy investors, following a year in which the shares had roughly tripled on expectations of sustained growth driven by demand from artificial intelligence data centers.
Demand dynamics across Western Digital's end markets are mixed. While AI data center demand remains robust, rising memory prices have delayed replacement cycles in consumer electronics. That slowdown has weakened demand in personal computer and consumer hard drive markets, segments in which Western Digital also competes. Summit's view is that softness in these smaller segments could offset part of the momentum coming from the company's core data center business.
Financial results for the quarter showed strength: Western Digital reported revenue of $3.75 billion for the fourth quarter, up 44% year-over-year and above the $3.69 billion estimate. Adjusted earnings were $3.56 per share, beating the $3.30 estimate.
Summit’s downgrade centers on a few interrelated execution and margin considerations tied to the HAMR transition. The firm expects implementation costs to rise as production shifts to the new technology, and forecasts a reversal in ASP trends in 2027 when HAMR drives enter the market. Those developments, together with contractual constraints from large, long-term customer agreements, lead Summit to anticipate a moderation in Western Digital's financial outperformance beginning in 2027.
The company's recent guidance and quarterly metrics provide some near-term support, but the market response suggests investors are sensitive to medium-term execution and margin uncertainty around the HAMR rollout.