Better Buy: Western Digital Corporation vs. Intel Corporation

Western Digital(NASDAQ: WDC) and Intel(NASDAQ: INTC) are both mature tech companies that lead their respective industries. WD is the world’s top maker of HDDs (hard disk drives), and Intel is the top manufacturer of CPUs for PCs and data centers.

Yet both market leaders have fallen out of favor. WD’s stock tumbled 40% over the past six months, while Intel’s stock slumped 15%. Why did investors dump both stocks, and is either tech giant a worthy buy at these prices?

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Figurines of a bull and a bear on a stock chart.

What do Western Digital and Intel do?

WD controls 40% of the global HDD market according to Coughlin Associates. Its closest rival, Seagate, holds a 37% share. However, the market for traditional platter-based HDDs is being disrupted by the rise of flash memory-based SSDs (solid-state drives), which are smaller, faster, more power-efficient, and less prone to damage than HDDs.

To counter that disruption, WD acquired SanDisk, one of the world’s top manufacturers of flash memory chips and SSDs, in 2016. That takeover initially generated a tailwind for WD as NAND (flash memory) prices rose worldwide throughout 2016 and 2017. However, NAND prices peaked and started sliding earlier this year, and the tailwind became a headwind.

Intel controls roughly three-quarters of the market for PC CPUs, and about 99% of the market for data center CPUs. The company’s only meaningful competitor in both markets is AMD(NASDAQ: AMD), the only other major manufacturer of x86 chips. Intel generates most of its revenue from PC and data center chips, but it also generates revenue from three higher-growth markets: Internet of Things (IoT) chips, programmable chips, and memory chips.

Intel faces three main headwinds. First, it isn’t producing enough chips to meet market demand — which could force OEMs to buy more AMD chips. Second, that chip shortage is expected to reduce the number of PCs sold over the next few quarters, which will exacerbate the decline in memory chip prices. That drop would impact Intel’s own memory chip business, which co-produces chips with memory chipmaker Micron. Lastly, the company still hasn’t found a permanent CEO to replace Brian Krzanich, who resigned in June.

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A data center.

Which company is growing faster?

During fiscal 2018, which ended on Jun. 29, Western Digital’s revenue and earnings rose 8% and 64%, respectively. That growth can be attributed to strong sales across the PC and data center markets, higher memory chip prices buoying its NAND-related businesses, and better pricing power.

During the fourth quarter, WD’s total exabytes shipped rose 31% to 106.5 exabytes, and its average selling price per HDD rose 11% to $70 — even as its overall market share slightly dipped at the end of the year. Those numbers look solid, but analysts expect the headwinds in the NAND and PC markets — exacerbated by the unpredictable impacts of tariffs and currency fluctuations — to cause WD’s sales to slip 2% this year as its earnings drop 23%.

During Intel’s fiscal 2017 (which end on Dec. 30), the company’s revenue rose 6% as its non-GAAP EPS grew 28%. That growth was attributed to stable demand in the PC market, strong sales of data center chips, and the double-digit growth of its three higher-growth businesses.

For the current year, analysts expect Intel’s revenue and earnings to rise 11% and 20%, respectively. Those growth rates remain solid, but they’re expected to decelerate significantly in fiscal 2019 as the chip shortages, competition from AMD, and pricing pressures across the memory chip market take their toll. However, investors should remember that Intel still has other irons in the fire — including chips for connected and driverless cars and baseband modems for Apple‘s new iPhones.

WD’s steep sell-off has reduced its forward P/E to 5, and it currently pays a forward dividend yield of 3.7%. Intel trades at less than 11 times forward earnings, and it pays a forward dividend yield of 2.7%.

The verdict: Intel’s a safer bet (but I’m not a buyer)

I personally wouldn’t buy either WD or Intel at these prices, since both companies face significant challenges in an unforgiving market. But if I had to choose one over the other I’d stick with Intel, since it has stronger growth rates and a better diversified business. Intel should also overcome its chip shortages and leadership issues over the next few quarters.

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Leo Sun owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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