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Special Report
Western Digital: The Storage Behemoth Skyrocketing on AI DemandReported by Leo Miller. 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: Elon Musk: This Could Turn $100 into $100,000
Hard disk drive (HDD) maker Western Digital (NASDAQ: WDC) has been 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 shown no signs of slowing in 2026, rising more than 150% and ranking among the S&P 500’s top five performers so far. Western Digital’s success comes as the company is seeing intense demand for its storage devices from artificial intelligence (AI) customers.
As AI developers continue to improve their models and have them perform more tasks, data requirements keep rising. Western Digital’s latest earnings report shows that it is continuing to ride the AI wave. The company also 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 its 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 topped expectations of $3.25 billion. Meanwhile, adjusted earnings per share (EPS) rose 97% YOY to $2.72, exceeding estimates of $2.39, which called for 76% YOY growth. Guidance also came in well above expectations. Next quarter, the company expects to generate revenue of $3.65 billion at the midpoint. That would imply growth of approximately 40% YOY, above expectations of $3.46 billion. On adjusted EPS, the company is forecasting $3.25, or growth of 96% YOY, easily exceeding 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 data storage in a personal computer. The company sold 199 exabytes of nearline HDDs during the quarter, an increase of 37% YOY. That compares with just 23 exabytes of non-nearline HDDs, which rose 9.5% YOY, underscoring 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 data storage capacity to customers going forward. The company explicitly said that it “has no plans” to increase HDD unit production. In other words, it will not deliver more data storage by increasing the raw number of HDDs it can produce. 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 offers several key benefits to both companies. First, limiting unit capacity helps preserve pricing power. Flooding the market with more units would put downward pressure on prices, offsetting one of the key dynamics Western and Seagate are benefiting from. Western noted that prices increased by 9% YOY during the quarter. Second, the company does not need to make massive investments in new production facilities, which helps keep costs down and boost 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 noted 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 company 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 in place with hyperscalers that extend into calendar years 2028 and 2029. That is a significant support for Western’s outlook, as customers lock in orders years in advance. Combined with its strategy not to increase unit capacity, Western has significant room for 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 an opportunity 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 were to happen. Still, Wall Street analysts appear to be raising 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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