Raymond James analysts downgraded Western Digital (NASDAQ:WDC) to Market Perform from Outperform, citing the company’s current valuation as the primary reason. The analysts noted that although the fundamentals in the HDD and NAND markets are expected to continue improving, Western Digital’s stock has already surpassed the firm’s price target and is now trading at eight times the previous peak earnings per share. The stock’s rally, the analysts suggest, already reflects a reasonable recovery in these markets.

Using a sum-of-the-parts (SOTP) valuation approach, which the analysts consider more appropriate considering the company’s upcoming business separation, they see less than 10% upside potential. This is based on the assumption that the HDD business will trade in line with its peers like Seagate Technology (STX), and the NAND business will trade at about a 50% discount to other memory peers on an enterprise value to sales (EV/S) basis.

The analysts pointed out that the pure-play NAND business is likely to be valued significantly lower than memory peers primarily involved in DRAM, due to the NAND sector’s fragmented nature and limited benefits from generative AI technologies.

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