Western Digital Corp. (NASDAQ: WDC) shares fell more than 7% in pre-market trading on May 1, as the company’s weaker-than-expected gross margin forecast overshadowed a third-quarter earnings beat and a strong revenue outlook driven by demand for AI storage.
"We do not see a structural change to our investment thesis," TD Cowen analysts said, raising their price target on the stock to $500 from $325. "Western Digital is maintaining the mid-to-high-single-digit year-over-year pricing framework it first provided in February 2025."
For its third quarter of fiscal year 2026, the company reported earnings per share of $2.72 on revenue of $3.34 billion, surpassing analyst consensus of $2.36 and $3.23 billion, respectively. However, the stock dropped to $404.37 in pre-market activity after closing at $434.52. The broader chip storage sector also saw declines, with Seagate Technology and Micron Technology falling over 1%.
The sell-off highlights investor focus on profitability in the capital-intensive storage market. While demand for high-capacity drives for AI data centers is booming, the guidance for decelerating incremental gross margin growth—from 90% to a guided 60-65%—suggests intense competition and potential pricing pressure that could cap future earnings.
The primary driver for the negative stock reaction appears to be the company's forward-looking statements on profitability. TD Cowen attributed the after-hours slide to the guided deceleration in incremental gross margins for the upcoming June quarter. This compares unfavorably with rival Seagate Technology (NASDAQ: STX), which implied an 80% incremental gross margin in its own forecast.
Western Digital's average selling prices (ASPs) for its products rose 7% quarter-over-quarter in the March period, a positive sign of pricing power. However, the firm's guidance implies a potential slowdown in that momentum. Analysts at TD Cowen suggested Western Digital may have already committed to selling some volume at pre-determined prices for the June quarter, which could be weighing on the margin outlook.
Despite the margin concerns, the long-term picture remains robust, according to TD Cowen, which is projecting $21 in calendar year 2027 earnings per share for WDC based on continued ASP growth. The stock has returned a remarkable 893% over the past year, and some metrics suggest it may be in overbought territory.
This article is for informational purposes only and does not constitute investment advice.
