Western Digital (NASDAQ: WDC) experienced a notable sell-off in after-hours trading on Wednesday, with shares tumbling approximately 10% to hover near $466. This decline followed a 5.4% drop during the regular session, signaling that investors were already pricing in potential disappointments ahead of the company's fiscal fourth-quarter earnings report.
The storage giant delivered results that surpassed analyst expectations on both the top and bottom lines. Adjusted earnings per share came in at $3.56, exceeding FactSet consensus by 7.6%, while revenue reached $3.747 billion, beating estimates by 1.3%. Non-GAAP gross margin expanded to 54.4%, a substantial improvement from the prior quarter. Free cash flow also strengthened, reaching $1.28 billion, representing 34% of revenue.
Despite these robust figures, the market's reaction was decidedly negative. The primary concern appears to be valuation. Western Digital shares had nearly tripled over the course of 2026 prior to this report, leaving little room for upside even after a typical earnings beat. The deceleration in growth metrics is particularly notable: adjusted earnings grew 31% sequentially in the June quarter, but the midpoint guidance for September signals only 12% growth. Revenue growth is also slowing, from 12% to 9% sequentially, while the anticipated increase in gross margin narrows from 390 basis points to 110 basis points.
CEO Irving Tan expressed "continued confidence in the durability of demand," and CFO Kris Sennesael projected a midpoint gross margin of 55.5% with adjusted earnings of $4.00 per share for the September quarter. The company's guidance for revenue in the range of $4 billion to $4.2 billion, compared with a $4.06 billion FactSet estimate, and adjusted EPS of $3.85 to $4.15 versus the $3.84 consensus, were both ahead of expectations. However, the market's focus was on the diminishing growth trajectory.
The valuation debate is starkly illustrated by contrasting analyses. A discounted cash flow model featured on Yahoo estimated a fair value of $329.76, approximately 29% below the post-earnings price. Conversely, another DCF model on the same platform projected a figure exceeding $1,017, highlighting the significant impact that long-term margin assumptions have on WDC's valuation.
Analyst recommendations ahead of the earnings report varied widely. The MarketBeat consensus of 24 analysts rates the stock as a Moderate Buy, with a target of $520.32, implying about 12% upside from current levels. Citigroup is the most bullish with a Buy rating and $800 target, while UBS and Susquehanna maintain Neutral ratings with targets of $560 and $500, respectively. Wells Fargo's Overweight rating carries a $730 target. The range of targets underscores the uncertainty surrounding the company's ability to sustain its pricing power.
In comparison, Seagate Technology (NASDAQ: STX), Western Digital's primary HDD competitor, declined only 1% during the regular session, while WDC fell 5.4%. This divergence highlights the elevated earnings risk that investors had already factored into Western Digital shares.
Key risks remain, including reliance on a small number of suppliers and significant customers, potential declines in cloud spending, accelerated supply growth, tariff measures, pricing pressures, and delays in product launches. The immediate challenge for Western Digital is execution—whether it can achieve a 55.5% gross margin without implementing another significant price increase. Following Wednesday's decline, simply meeting guidance may not be sufficient to reassure investors.
