Can Western Digital Expand Margins on Higher-Capacity Drives?
Western Digital CorporationWDC is seeing higher-capacity drives play an increasingly important role in improving its margins. The company reported strong financial performance in fiscal 2026, with gross margin expanding 970 basis points (bps) to 49.1%. In the fiscal fourth quarter, gross margin increased 1,310 bps year over year to 54.4%. The improvement was driven by a mix shift toward higher-capacity drives, favorable pricing across the portfolio and disciplined execution in manufacturing operations.
The company began shipping its next-generation ePMR hard drives with capacities of up to 40 terabytes in the fiscal fourth quarter and expects a strong ramp over the following quarters. On the latest earnings call, management highlighted that the company is on track for these drives to account for 50% of nearline bits by the third quarter of fiscal 2027. The greater availability of higher-capacity drives is expected to provide additional opportunities for pricing while enabling the company to ship more capacity into the market.
Higher-capacity drives are also helping Western Digital improve its cost structure. Cost per terabyte declined approximately 8% year over year in the fiscal fourth quarter, while the company expects its long-term cost per terabyte to decline about 10% annually. Management attributed this reduction primarily to the transition toward higher-capacity drives and improved areal density. As the company executes its technology and product road map, including next-generation ePMR and HAMR products, cost per terabyte is expected to continue declining over time.
At the same time, higher-capacity drives provide more value to customers through better total cost of ownership, allowing Western Digital to increase price per terabyte while reducing cost per terabyte. Management stated this combination as a key factor supporting further gross margin improvement. The company reported incremental gross margins of 75% in fiscal 2026 compared with 60% in fiscal 2025, and ended the fourth quarter with year-over-year incremental gross margin of 84% to 85%. It expects approximately 80% to 81% incremental gross margin in the first quarter of fiscal 2027. Western Digital anticipates non-GAAP gross margin in the range of 55-56% for the first quarter.
Western Digital expects continued gross-margin improvement as it ramps higher-capacity ePMR drives and introduces 44-terabyte HAMR products. Management believes these product transitions can support more exabyte shipments at better pricing while reducing costs over time, providing a basis for continued margin expansion.
Taking a Look at WDC’s Competitors
Seagate Technology Holdings plc’s STX fourth-quarter fiscal 2026 non-GAAP gross margin reached 52.7%, up 570 bps sequentially and 1,480 bps year over year. The company expanded non-GAAP gross margin for the 13th consecutive quarter. Non-GAAP operating margin rose to 44.6% from 26.2% in the year-ago quarter, highlighting the scalability of the company’s operating model. Free cash flow reached $1.12 billion in the June quarter, representing a margin of approximately 31%, while fiscal 2026 free cash flow climbed to a record $3.1 billion. Management expects cash generation to improve sequentially throughout fiscal 2027, supported by revenue growth, pricing, operating leverage and capital expenditures maintained within 4–6% of revenues.
Sandisk Corporation’s SNDK fourth-quarter fiscal 2026 non-GAAP gross margin expanded to 84.6% from 78.4% in the previous quarter and 26.4% reported in the year-ago quarter. The result exceeded management’s 79-81% guidance. Non-GAAP operating margin rose to 79.2% from 70.9%, reflecting strong revenue growth and cost leverage. Adjusted free cash flow totaled $5.04 billion, excluding $1.94 billion of customer prepayments and deposits related to the new business models. For the first quarter of fiscal 2027, Sandisk expects revenues of $10.3-$10.8 billion. Non-GAAP gross margin is expected between 83% and 85%.
WDC Price Performance, Valuation and Estimates
In the past year, shares of WDC have surged 479% compared with the Zacks Computer-Storage Devices industry’s growth of 348%.
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Going by the price/earnings ratio, the company’s shares currently trade at 20.86 forward earnings compared with 9.43 for the industry.
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WDC’s estimate revisions are on an upward trajectory. The Zacks Consensus Estimate for WDC’s earnings for fiscal 2026 has been revised north by 4.96% to $18.85 over the past 60 days, while the same for fiscal 2027 has gone up 17.76% to $35.48.
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Currently, Western Digital has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
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