|The latest comments on WDC by investment firms display a wide difference between decisions reached through technical analysis and decisions based on fundamentals.|
The Deutsche Bank comments suggest a weakening of demand growth in 2018, which, together with the uncertainties over the sale of the Toshiba portion of the joint venture, result in a target reduction from $105 to $80. Is that reasonable? If one relies on technical analysis alone, it probably is, because TA at least can predict moderately well any short term changes, especially changes in price over a limited period of perhaps two or three months at the most.
But if investors consider the fundamentals, the picture remains quite different. The purported weakening of NAND flash demand in 2018, even if it occurs, won't affect earnings per share for at least six months, and maybe even longer than that. If the Toshiba sale to a consortium that includes Hynix, a major competitor, any damage that might occur from Hynix being able to access SanDisk proprietary technology would likely not affect Hynix or overall NAND flash prices for another six months or longer.
The participation of Apple in the consortium raises another issue. Would Apple use its financial interest in the consortium to force down prices of flash memory sold to Apple for its smartphones and computers? Apple has a habit of playing suppliers off against each other. With some ownership by Apple in the Toshiba portion of the joint venture, they could force prices favorable to Apple and avoid paying higher prices that otherwise might be charged by WDC, Micron, Samsung, and Hynix as well. I would think more than WDC would have some interest in the ability of Apple to set flash memory prices in a manner that is disadvantageous to all suppliers other than what Apple controls. Price fixing, or more properly, the ability to fix prices brings up issues of anticompetitive business practices, in addition to the current issue of whether WDC in fact has a contractual right to approve a change in ownership of the Toshiba portion of the JV.
Seems to me that WDC, if they are not totally stupid or hard headed, can work a deal that would be beneficial to its shareholders. If not, then they need new management, now. No matter how these legal issues are resolved, I think it's unlikely that there would be any adverse effect on WDC earnings for at least six months, if not more. And at present, given the near term estimates of earnings growth, WDC does not appear to be overpriced at all. Thus, if one relies on fundamentals, the shares are reasonably priced at current levels.
Some investors, however, tend to pursue strategies involving trading on short term movements, up or down. Their transactions undoubtedly please the firms that derive commissions on the transactions. But can this behavior be termed investing, or is it more akin to gambling? Warren Buffett many years ago had some sage advice for those who like to invest only for short term gains. Any gains received in less than a year, and particularly those received in less than a month, he said, should be taxed at least 90%. That would reduce volatility and allow the resulting market price of the shares to reflect the intrinsic value of the investment, rather than momentary sentiment. For the average investor, Buffett's advice is particularly important because it effectively warns individuals that they have little chance of beating the overall market through short term trading. There will always be larger investors or firms that can trade in and out long before the individual can act, thereby increasing the risks to individuals from not being able to obtain the best sale or buy price.
That's one reason why long term investing (Buffett believes that you should buy stocks with the intent of holding them forever) is surely a better strategy for more investors. I think this strategy holds true for WDC as well, with the assumption that long term buying and holding is warranted only if the fundamentals remain strong. Buffett has never sold a dime's worth of Berkshire Hathaway's Coca Cola stock, nor has he sold any GEICO insurance stock. These holdings go back more than 30 years. It's time for WDC investors to think accordingly.