Western Digital's 47% Operating Margin Has a Valuation Catch

Western Digital's stock rally is backed by a real earnings surge, but the headline price-to-earnings ratio flatters the valuation. The hard-drive maker's latest quarter shows how much pricing and cloud demand improved. Its trailing earnings, however, still include a large gain tied to the separation of Sandisk rather than the sale of storage products.

Trefis calculated that Western Digital shares rose 217.9% in the year through October 28, 2026, compared with a 13.7% gain for the S&P 500. Seagate rose about 215% over the same period, evidence that investors repriced hard-drive makers as a group. Western Digital's two biggest daily gains over that period came alongside reports about storage pricing. The path was volatile: the shares closed as high as $745.99 on June 18 before falling to $396.42 on October 28, a 47% retreat from that peak.

The operating improvement is substantial

Western Digital reported $4.381 billion of revenue for the fiscal first quarter ended October 2, up 55% from a year earlier. Total hard-drive capacity shipped reached 248 exabytes, up 22%, including 223 exabytes of nearline drives used mainly by cloud and enterprise customers. The company's filing said cloud revenue represented 88% of total sales and increased 54%, supported by more than 20% growth in exabytes shipped and about 25% growth in average selling price per exabyte.

Pricing, volume and newer products also transformed profitability. GAAP operating income rose to $2.046 billion from $792 million, while GAAP operating margin expanded to 46.7% from 28.1%. Western Digital's official earnings release reports 46.7%, not the 47.7% figure in Trefis's account. On an adjusted basis, operating margin reached 49.1%, compared with 30.4% a year earlier. Free cash flow was $1.38 billion, and management raised the quarterly dividend 17% to $0.175 per share.

The next-quarter outlook points to further momentum. Western Digital guided to $5.1 billion of revenue, plus or minus $100 million, and a 60% to 61% non-GAAP gross margin for fiscal Q2 2027. The midpoint would put revenue roughly 16% above fiscal Q1 and extend the margin expansion. It is guidance, not a completed result, and the storage market remains cyclical.

Why the P/E can mislead

Trefis estimated that Western Digital traded at 16.8 times trailing earnings at the end of September 2026, close to 16.2 times a year earlier. The price-to-sales ratio rose much more sharply, from 4.1 to 11.5. The apparent stability in the P/E does not mean the operating business became only slightly more expensive.

Western Digital's fiscal 2026 filing explains the gap. The company recorded a $6.498 billion mark-to-market gain on its retained Sandisk stake after separating the flash business in February 2025. That gain helped lift fiscal 2026 net income to $9.424 billion, more than double the year's $4.453 billion of operating income. Western Digital also recorded costs tied to debt-for-equity and other transactions, but the Sandisk revaluation was the dominant non-operating item.

The latest quarter gives a cleaner view of the continuing hard-drive business. GAAP net income attributable to common shareholders was $1.779 billion against $2.046 billion of operating income. Investors therefore have two distinct questions: whether high-capacity drive pricing and cloud demand can sustain today's margins, and what valuation the stock deserves once the Sandisk gain no longer supports trailing earnings.

Western Digital's January report will provide the next test. Revenue growth matters, but operating income, pricing per exabyte and the mix of nearline shipments will show whether the rerating rests on durable storage economics rather than an unusually favorable earnings denominator.