I need to let you know what I’m going to do with our loser, WDC.
Long story short, I feel completely misled by management there and I am astonished at how badly they’ve mismanaged things in just the last 90 days.
You guys know I’m a long-term kind of investor. The reason I bought WDC is because they are now part of a flash storage oligopoly while I think there is about to be a multi-year secular growth cycle in demand for NAND storage driven by driverless cars, robotics, IoT, Cloud and so on. And WDC bought Sandisk which was the leader in flash and owns a bunch of flash patents. But here’s the first part of where I’m so disappointed in WDC’s management. WDC has been highlighting how they’re going to be big in cloud flash and that margins in enterprise flash storage would be industry-leading even in a down cycle of pricing like we’re seeing here.
But the quarter they just reported was only industry-leading on the downside for margins and profitability. The company’s disk storage business is going to be increasingly worthless in years ahead but it’s supposed to be flash that’s going to drive the future. But the company now admits that they’ve fallen behind in flash storage technology just as Micron and others are putting flash and DRAM into the same chips and driving a future that’s was supposed to belong to WDC. Management had a reputation as excellent operator, but that was hdd only. Clearly they aren’t as good with memory semi/systems.
Meanwhile, and here’s what truly blows my mind — the company spent a billion dollars buying its own stock back, mostly in the $80s where you and I were buying it. But you and I didn’t know what WDC management clearly had to have known — that the quarter was going to be terrible and their margins are declining faster than the rest of the industry. WDC has had a multi-billion dollar buyback program in place for years but they’ve never actually bought much stock back until this last 90 days? Right into this horrible quarter? And instead of having just sent us investor that money in a dividend or having spent that money buying up every leading flash storage start-up on the planet, WDC just lost $500 million (they spent $1 billion buying back stock in the $80s and the stock is now in the $40s) at the Wall Street casino when they, of all people should have known the quarter was going to be terrible.
So the stock is wildly cheap right now on a lot of metrics including at about 6x next year’s earnings estimates, but we have to question if next year’s earnings estimates are even attainable if the company has fallen behind its competitors.
One of the most important rules in investing is to only put your money behind management your believe in. Another most important rule in investing is to cut your losses and ride your winners. We have so many big winners that we’ve ridden over the years and we have done a good job of culling our losers along the way too. I’m going to grudgingly sell my WDC and move on from this name for now. I reserve the right, as always, to revisit it later. But I can’t fathom a worse 90 days of execution by any tech management out there. And I want to run with winners and this one’s been nothing but a loser for us.
I’m selling all of my WDC and taking the losses and moving on.