Western Digital is spinning off its NAND and SSD business, which could be valued similarly to Solidigm, says Wedbush analyst Matt Bryson.
Disk drive and SSD manufacturer Western Digital is splitting into two distinct businesses, one making hard disk drives (HDDs) and the other making NAND flash and SSDs. Current WD CEO David Goeckeler will run the NAND and SSD business while EVP for Global Operations Irving Tan will become CEO of the HDD business.
Bryson calculates that the NAND and SSD side of Western Digital (based on acquiring SanDisk nine years ago for $19 billion) could be valued between $10 billion and $23 billion as a standalone business.
He told subscribers: “The net of our analysis remains that the value of the HDD portion of Western Digital comprises nearly the entirety of the total company valuation (at just over $20 billion) and that SanDisk is effectively valued at close to nothing.
“Our sum of the parts valuation suggest that the market is simply attaching no value to WDC’s NAND business.”
We can see this if we compare Western Digital and Seagate annual revenues and market capitalization. Seagate, which is overwhelmingly an HDD business, earned $6.6 billion in revenues in its last fiscal year. Its current market capitalization is $21.4 billion. Western Digital revenues for its latest fiscal year were $13 billion, making it twice as big as Seagate, while its market capitalization of $21.9 billion values it as almost equal to Seagate. Thus, effectively, half of Western Digital’s business is valued at nothing compared to Seagate.
In his note, Bryson attempts to estimate the standalone worth of the NAND/SSD part of Western Digital, considering four financial issues and then making assumptions. The issues are:
- Today Western Digital has debt. How will it be apportioned between the two new companies?
- Will the split be accompanied by a stock sale to raise capital?
- How will Western Digital’s current operating expenses be divided between the two new companies?
- How will these two new businesses be taxed?
Also, there are no means of breaking out the expenses of Western Digital’s NAND business.
He makes a series of assumptions about these issues. The Western Digital HDD business will have operating expenses equivalent to those of Seagate. They might be less as Western Digital won’t have the expenses of the Seagate Lyve and systems business operations.
As the Western Digital HDD operation generates most of the company’s cash, it should take on “the lion’s share of the debt.” It has a greater ability to pay the debt, “more modest future capital requirements,” and could refinance “the debt load given the former conditions.”
He also reckons that there will be “a somewhat lighter tax burden for the HDD entity” versus the NAND/SSD business based on historical precedent.
Given these issues and assumptions, he estimates the HDD business is worth between $19 billion and $24 billion using 8x and 10x sales net income multiples. The NAND/SSD operation is worth between $10 billion and $22 billion, depending upon gross margin estimates and sales net income multiples.
In summary, Bryson said: “We believe that once split, the separate SanDisk and WD entities should be worth at least $30 billion, and arguably will eventually command a valuation of $40 billion-plus if we are correct and NAND and HDDs are indeed entering into a prolonged up cycle with the full benefits manifesting in 2025.”
Bryson pointed out that ”SanDisk’s lowest market cap (in the three years prior to WD’s proposed acquisition) was around $10 billion.” SK hynix paid a similar amount for Solidigm.
