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Western Digital (WDC -3%) is trading a bit lower following its Q2 (Dec) earnings report last night. At first blush, it looks great. The data storage giant reported a much narrower than expected loss. It also guided Q3 (Mar) EPS and revenue well ahead of analyst expectations. The problem seems to be that a good quarter was likely priced in already given the recent huge move in the stock. Also, peer Seagate (STX) was quite bullish on its call this week. We suspect we are seeing a sell-the-news reaction.

• The industry has been in a downturn. However, WDC was pretty positive at an investor conference last month. Its general point was that it felt the bottom is behind it in NAND and the recovery is on. WDC was also positive on last night's call, although maybe slightly less enthusiastic. However, we may just be nitpicking there.
• Flash revenue rose 7% sequentially to $1.67 bln as flash ASPs increased 10% on a blended basis. WDC said this was stronger than anticipated entering the quarter. Bit shipments decreased 2% after record shipments in the prior quarter. HDD revenue rose 14% sequentially to $1.37 bln as total exabyte shipments increased 14% and average price per unit increased 9% to $122.
• By market segment, Cloud (35% of revs) rose 23% sequentially to $1.07 bln due to higher nearline shipments to data center customers and better nearline pricing. HDD Cloud revenue increased yr/yr for the first time in six quarters. Client (37% of revs) revenue came in at $1.12 bln, down 2% sequentially as an increase in flash ASP was more than offset by a decline in flash bit shipments. Consumer (28%) rose 15% sequentially to $839 mln primarily due to seasonal strength in flash bit shipments.
• WDC said it is seeing a recovery in both flash and HDD markets. Generative AI has emerged as another growth driver and transformative technology. WDC believes the second wave of generative AI-driven storage deployments will spark a client and consumer device refresh cycle and reaccelerate content growth in PC, smartphone, gaming, and consumer in the coming years. WDC believes its Flash portfolio is extremely well-positioned to benefit from this emerging secular tailwind.

Overall, this was a great quarter for Western Digital. We do not interpret the downside today as disappointment over the results in light of the big beat-and-raise. The one area we think may have been a slight disappointment was maybe management not being quite as definitive as investors would have liked in terms of where it is in the industry cycle. STX said on its call that SepQ marked the bottom of the cycle. But WDC was still quite positive on the call. The other thing is that the stock has made a big run in recent weeks, so a lot of good news was likely priced in already.