Western Digital shares tumbled 11.7% on Friday after reports that rival Toshiba plans to double its hard-disk-drive production capacity. Investors are reacting to the threat of lost market share and a possible price war, though the stock's valuation already carries a sizable cushion.
Western Digital stock tumbled 11.7% through 1 p.m. ET Friday, dragged down not by its own results but by a rival's expansion plans. Investors sold the stock amid reports that Toshiba, the world's No. 3 hard-disk-drive maker, is building out capacity to chase a bigger slice of the market. Rival Seagate Technology, which also competes in hard drives, fell 11.70% the same day.
Toshiba targets AI storage demand
Toshiba will spend $400 million on capital expansion to double its hard-disk-drive production capacity by fiscal 2027. The investment centers on Toshiba's factories in the Philippines and targets the growing market for hard-disk storage that supports artificial intelligence services.
Western Digital and Seagate Technology each currently hold 40% or more of the global hard-drive market, while Toshiba's share sits around 17%. Doubling production could take Toshiba to 30% or a little better, potentially vaulting it from third place to second, depending on which rival loses the most share.
Margins at risk if a price war follows
Beyond bragging rights, Toshiba's buildout raises a second concern: price competition. Toshiba will need enough sales to justify the added capacity, and underpricing Western Digital and Seagate is one way to secure it. Western Digital would likely need to match lower prices, which would squeeze its profit margin and put its projected 68% annual earnings growth rate at risk.
Is the drop an overreaction?
Western Digital stock traded at under 18x earnings even before Friday's sell-off, a valuation that already builds in a significant margin of safety. Motley Fool analyst Rich Smith, who reported the sell-off, said the risk from Toshiba is real but that Friday's drop still looks like an overreaction.
Source: The Motley Fool
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