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Western Digital (WDC -12%) is trading sharply lower despite reporting an impressive fiscal Q2 (Dec) beat-and-raise last night. Results were driven by accelerating cloud demand tied to higher-capacity storage and expanding AI workloads.

• Cloud revenue represented 89% of total sales, totaling $2.7 bln, up 28% yr/yr, driven by strong demand for higher-capacity nearline products. Client revenue accounted for 6% of total revenue, up 26% yr/yr. Consumer revenue represented 5% of total revenue, down 3% yr/yr.
• As AI capabilities expand, data generation and data value continue to rise, driving rapidly increasing demand for storage across training and inference workloads. • The combination of AI growth and cloud expansion is fueling a surge in demand for higher-density storage solutions.
• During the quarter, WDC shipped over 3.5 mln units of its latest-generation ePMR products, offering up to 26 TB CMR and 32 TB UltraSMR capacities. The company has also begun qualification of its HAMR and next-generation ePMR platforms with separate hyperscale customers. These platforms deliver significantly higher storage density versus conventional drives, enabling mass-scale data analysis.

Why the stock is lower: The primary driver appears to be a sell-the-news reaction. WDC shares have surged from roughly $50 in early June to $278 heading into yesterday's close, leaving the stock looking overbought. In addition, peer Seagate (STX) reported strong earnings earlier this week, suggesting that a beat-and-raise was largely priced in.

Another overhang emerged during the Q&A, when WDC stated that it intends to monetize its equity stake in SanDisk (SNDK) before the one-year anniversary of the separation on February 25, which is right around the corner. WDC currently owns 7.5 mln shares of SanDisk. Based on recent pricing, that stake is worth approximately $4.6 bln. Management indicated it is considering a debt-for-equity swap. Given SanDisk's outsized recent performance, WDC's stake has likely contributed meaningfully to the stock's sharp rally. An exit from the SanDisk position could therefore weigh on sentiment and remove a key supporting factor for WDC shares going forward.

Briefing.com Analyst Insight:

Western Digital delivered a strong operational quarter, underscored by accelerating cloud demand and growing confidence in its next-generation storage platforms tied to AI-driven workloads. However, with the stock already pricing in a near-flawless outcome, the results were not enough to sustain momentum. The planned monetization of WDC's SanDisk stake introduces an additional sentiment risk, particularly given how much value that stake currently represents. While long-term fundamentals tied to AI and hyperscale storage remain compelling, near-term upside may be capped as investors digest valuation, positioning, and capital structure uncertainty.