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Special Report
Western Digital: The Storage Behemoth Skyrocketing on AI DemandWritten by Leo Miller. Originally Published: 5/6/2026. 
Key Points
- Western Digital was one of the market's most impressive stocks in 2025, and has already more than doubled in 2026.
- AI data centers are driving nearly all of the firm's demand, with agreements extending to the end of the decade.
- The firm's prioritization of R&D over production capacity is key to its strength and is important for investors to understand.
- Special Report: The Biggest IPO Ever: Claim Your Stake Today
Hard disk drive (HDD) maker Western Digital (NASDAQ: WDC) has been operating in truly rarefied air when it comes to stock market performance. In 2025, the tech stock delivered a total return of more than 280%, ranking as the S&P 500’s third-best-performing stock of the year. Shares have kept climbing in 2026, rising well over 150% and ranking among the top five performers in the index so far. Western Digital’s success comes as the company sees rabid demand for its storage devices from artificial intelligence (AI) customers.
As AI developers continue improving their models and expanding the number of tasks they can perform, data requirements continue to rise. Western Digital’s latest earnings report shows that it is still riding the AI wave. The company has strong revenue visibility over the next several years, even as investors debate whether the stock's remarkable run still has room to continue. Western Posts Beats on Sales, EPS, and GuidanceIn fiscal Q3 2026, Western Digital posted revenue of $3.34 billion, marking an impressive 45.5% year-over-year (YOY) increase. (Note that Western Digital’s fiscal reporting period is approximately two quarters ahead of the standard calendar-year reporting period.) This was the company’s highest revenue growth rate in nine years and modestly exceeded expectations of $3.25 billion. Meanwhile, adjusted earnings per share (EPS) rose 97% YOY to $2.72, topping estimates of $2.39, which called for growth of 76% YOY. Guidance also came in well above expectations. Next quarter, the company expects to generate revenue of $3.65 billion at the midpoint. That would equate to growth of approximately 40% YOY, above expectations of $3.46 billion. On adjusted EPS, the firm is forecasting $3.25, or growth of 96% YOY, well above estimates of $2.75. Cloud Drives Big-Time Demand for Nearline HDDsNotably, 89% of the company’s revenue during the quarter came from cloud customers, with the firm seeing very strong demand for its nearline HDDs. Nearline HDDs store very large amounts of data, and AI data centers are deploying them en masse. The company uses exabytes to measure the capacity it sells. For reference, one exabyte is equal to a million terabytes (TB), and one TB is already considered a fairly large amount of storage for a personal computer. The company sold 199 exabytes of nearline HDDs during the quarter, an increase of 37% YOY. That compares with just 23 non-nearline HDD exabytes, which increased 9.5% YOY, showing that nearline demand is the company’s primary growth driver. Overall, cloud revenue hit $3 billion, rising 48% YOY. Western: R&D Over Production CapacityFor Western Digital, it is important to understand how the company plans to deliver more and more data storage capacity to customers going forward. The company explicitly said it “has no plans” to increase unit HDD production. In other words, it will not expand data storage by increasing the raw number of HDDs it produces. Instead, it is investing in research and development to increase the storage capacity of each HDD. Its top competitor, Seagate Technology (NASDAQ: STX), is taking a similar approach. This strategy provides several key benefits to both firms. First, limiting unit capacity helps preserve pricing power. Flooding the market with more units would put downward pressure on prices, counteracting one of the key dynamics Western and Seagate are benefiting from. Western noted that prices increased 9% YOY during the quarter. Second, the company does not have to make massive investments in new production facilities, allowing it to keep costs down and increase free cash flow. Western’s free cash flow rose 124% YOY to $978 million, dramatically outpacing its 13% YOY increase in capital expenditures to $145 million. Lastly, higher-capacity HDDs carry higher margins. During the quarter, Western’s gross margin rose by a whopping 1,040 basis points to 50.5%. The company notes that its shift toward higher-capacity HDDs was one of the main factors behind the improvement. By pursuing its strategy of increasing per-HDD storage capacity, the firm can keep these key dynamics intact. Western’s Business Is as Strong as Ever, and Everyone KnowsWestern says its long-term visibility continues to improve, with agreements with hyperscalers extending into calendar years 2028 and 2029. This is a significant support for Western’s outlook, as customers are locking in orders years in advance. Combined with its strategy of not increasing unit capacity, there is significant potential for Western’s margins to keep moving higher. It’s no secret that Western has performed remarkably well, raising questions about how much farther its rally can run. But AI demand is not slowing down, and broader trends in the AI trade continue to improve. That gives Western shares room to keep climbing, though investors should not overlook the risk of an AI spending pullback. Given Western’s massive gains, the stock would likely be among the hardest hit if that materializes. Still, Wall Street analysts seem to be only increasing their forecasts. The MarketBeat consensus price target on Western currently sits near $396, a figure that implies more than 10% downside in shares. Targets moved up sharply after the company’s earnings report, but the stock has already caught up with many of them. The average of targets released after the company’s earnings report is approximately $483, implying upside of less than 5%. |
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