After Western Digital ( WDC ) announced a major $4 billion share buyback program and delivered notable fiscal second-quarter results, WDX shares are worth buying for growth investors, given the tech company’s rapid expansion, strong leverage from the AI ​​revolution, and relatively low valuation. Also important, its share buybacks may frustrate short sellers, which could lead to a short-covering rally in the name over the medium to long term.

One of the largest hard disk drive (HDD) markers in the US Western Digital is benefiting from strong demand for hard disk data centers amid the AI ​​boom. Its hard drives are also used in computers and consumer electronics.

The company has a market capitalization of $98.4 billion and a price-to-earnings ratio of 42 times. Barchart Technical Opinion rates the stock as a strong buy.

On February 2, Western Digital disclosed that its board had approved a $4 billion share buyback of WDC. The company noted that the authorization would be “effective immediately” and stated that buybacks would be made based on “market conditions and other corporate considerations.”
Last quarter, the company’s revenue rose 25% year-over-year to $3 billion, WDC reported on Jan. 29. Impressively, its operating income rose 62% year-over-year (YOY) to $908 million, helped by a 6.9 percentage point increase in its operating margin from the prior year. Finally, its diluted net income per share soared 272% to $4.73 from $1.27.

With a growing number of companies and government agencies compiling large amounts of data to power AI agents and AI-powered applications, demand for data storage is increasing, as WDC’s financial results show. Indeed, CEO Irving Tan indicated that the company has struggled to meet demand for its offerings.
“Western Digital’s strong performance this quarter reflects our disciplined execution to meet demand from the AI-driven data economy,” Tan said in a statement included in the company’s earnings press release.
Following the company’s second-quarter results, Morgan Stanley ( MS ) expects the disk drive maker to benefit from the AI ​​boom for a significant period of time. Anticipating that WDC’s margins will continue to expand going forward, the firm raised its price target on the name to $369 from $306, while maintaining an “overweight” rating on the stock.
And two new hard drives released by the firm recently look set to keep data centers very interested in its products for the foreseeable future. One of the new HDDs provides twice the bandwidth of traditional HDDs, while the other provides twice the bandwidth and twice the I/O of standard HDDs.
according to Tom’s hardware“Over time, high-bandwidth HDDs are expected to increase bandwidth eightfold and I/O fourfold when both approaches are combined within a single HDD.”

By reducing the number of shares counted in Western Digital’s float, the company’s massive share buybacks will increase its earnings per share and put downward pressure on its price-to-earnings ratio. As a result, the company’s EPS growth will rise and appear cheaper, making it more attractive to investors and increasing demand for the stock.
As a result of this dynamic, stocks are more likely to rise, forcing more short sellers to buy back shares. In addition, the company’s share buybacks reduce the number of shares available, so it will be harder for shorts to find shares to buy, and they will likely be forced to pay more for the shares they do locate. Finally, new short sellers will have a harder time finding short stocks. All these dynamics increase the chances that the WDC will come under short pressure. The valuation and bottom line at WDC’s forward price-to-earnings ratio of 36x is a bit high. But given its strong growth and high leverage from the AI ​​boom, the valuation isn’t excessive. Providing evidence for this claim, the stock’s PEG ratio, a valuation measure that takes growth into account, is a fairly low 0.97 times.
Driven by AI’s high leverage, a $4 billion share buyback plan, and improved products, WDC stock looks well positioned to outperform the stock market over the medium to long term.

As of the date of publication, Larry Ramer had no positions (either directly or indirectly) in any of the securities mentioned in this article. All information and data in this article is for informational purposes only. This article was originally published on Barchart.com