Chasing NVIDIA? Western Digital May Be the Smarter AI Bet

With the rise of artificial intelligence (AI), NVIDIA Corporation NVDA has emerged as a prime beneficiary, with its shares soaring and helping the company surpass a $5-trillion market capitalization. The rally has been fueled by incessant demand for NVIDIA’s advanced chips and CUDA software platform.  

Given NVIDIA’s remarkable AI-driven growth, investors would be tempted to buy the stock. However, NVIDIA’s gains have been subdued this year, up only 16.7%. Even though the broader tech sector has remained resilient, investors are increasingly concerned about a potential slowdown in AI spending and its impact on NVIDIA’s earnings, which have so far remained phenomenal.  

Tighter restrictions on chip exports to China and stiff competition could also weigh on NVIDIA’s growth trajectory. Against this not-so-encouraging backdrop, investors should consider other beneficiaries in the AI ecosystem, such as Western Digital Corporation WDC, whose shares have surged 154.5% this year and have further room to scale upward.  

Western Digital continues to benefit from AI-driven demand for high-capacity data storage. Let’s explore in detail why Western Digital could be a smart buy now –  

WDC’s AI Tailwinds and Earnings Growth Create Further Upside 

Western Digital recently reported revenues of $3.75 billion in the fiscal fourth quarter of 2026, up 44% from a year ago, according to the company’s press release. The company’s top-line growth isn’t due to cost-cutting or acquisitions; it is primarily driven by strong demand for storage products.  

Further, the company expects revenues of $4.1 billion for the first quarter of fiscal 2027, plus or minus $100 million. At the midpoint, this would represent 42-49% year-over-year growth, indicating that revenue growth is expected to carry into fiscal 2027, and the robust performance reported last quarter wasn’t just a temporary surge. 

As storage continues to become a strong component of the AI infrastructure buildout, Western Digital is poised to gain further. The company is therefore forecasting a healthy non-GAAP gross margin of 55-56% for the fiscal first quarter of 2027, up from 54.4% reported in the fiscal fourth quarter of 2026. 

Further, margin expansion, along with strong revenue growth, could enhance Western Digital’s operating leverage, translating into faster growth in operating income and earnings. The company has generated a strong free cash flow of $1.28 billion in the fiscal fourth quarter of 2026, providing the company greater financial flexibility to reinvest in research and development, strengthen the balance sheet, and fund growth initiatives. 

Hence, strong revenue growth, margin expansion and robust cash flow are expected to continue to boost Western Digital’s earnings growth and support further upside in its share price. Brokers also see greater upside potential in Western Digital. 

The average short-term price target for WDC stock is $664.77, representing a 53.1% upside from its last closing price of $434.30. The highest price target stands at $1,050, suggesting a potential upside of 141.8%.

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Therefore, it’s prudent for investors to place bets on Western Digital at the current levels to capitalize on its upside potential. Consequently, the company’s expected earnings growth rate for the current year is 84.4%. The Zacks Consensus Estimate of $18.85 for WDC’s earnings per share is up 165.1% year over year.

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Western Digital currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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