Valuation concerns can be such a pain for stockholders,witness what happened to Western Digital Corp. recently.
The Lake Forest-based disk drive maker, which saw its stock soar late last month after upping sales and profit guidance, fell 4% in a day’s trading after a J.P. Morgan & Co. analyst downgraded the company’s shares. The concern: a high valuation.
Two weeks ago J.P. Morgan shifted its rating on Western Digital to “underweight” from “neutral,” saying the stock’s recent runup has gotten ahead of Western Digital’s growth prospects.
“In our view, now is an opportune time for investors to trim positions ahead of the often challenging summer months,” the J.P. Morgan report said.
Shares of Western Digital recently were at $12.7, up from a 52-week low of about $6.4.
Even so, Western Digital saw profits and revenue grow sharply in the March quarter.
Last week, Western Digital said its profit in the March quarter grew 48% to $71 million, versus a year earlier. Revenue was up 23% to $920 million.
“The supply/demand environment in the hard drive industry was well balanced throughout the quarter, which translated into an improved pricing environment,” said Matt Massengill, chairman and chief executive officer of Western Digital. “Combined with strong demand for high capacity hard drives, improved traction in non-desktop PC markets and our ongoing cost and quality leadership, we produced stellar results in the fiscal third quarter.”
Western Digital is operating in a disk drive market that could be downshifting.
Shipments of personal computers could grow by 9% this year, thanks in large part to more sales of laptop computers, according to market researcher Gartner Inc. But that growth estimate is below 2004’s PC shipment growth rate of 11.6%.
In all, PC shipments could grow to 199 million units this year, up from 183 million units shipped in 2004. Western Digital’s drives, which have mainly powered desktop computers in the past, now are made for portable computers since last year. That looks like a good move.
LAVA Flow
Speaking of computer makers, Irvine-based PC maker Gateway Inc. founder and chairman Ted Waitt is expected to give a speech at the upcoming Los Angeles Venture Association Investment Capital Conference.
Other Orange County speakers expected at LAVA, as the conference is known: Byron Roth, chief executive of Newport Beach’s Roth Capital Partners LLC; Harry Lambert, managing director of Costa Mesa-based InnoCal Venture Capital; and Heath Clarke, chief executive of Laguna Hills-based Interchange Corp.
LAVA is set for the Millennium Biltmore Hotel in downtown Los Angeles on April 27.
Cash Settlement
Gateway recently got a cash infusion courtesy of a Microsoft Corp. settlement. Gateway is set to receive $150 million in the next four years from the software maker.
The settlement comes at the right time,just as Gateway is trying to increase its brand in retail channels. Gateway said it expects to spend the money on marketing, including advertising, sales training and consulting. Some also could go toward research, development and testing of products running Microsoft software.
The settlement itself is from a vintage piece of litigation. It stems from the federal antitrust case against Microsoft from the late 1990s. Gateway was cited in the case as a computer maker impacted by Microsoft’s business practices.
As part of the settlement, Gateway plans to drop all antitrust claims against Microsoft.
Gateway, which moved to Irvine from San Diego County last year, is in the midst of a turnaround bid led by Chief Executive Wayne Inouye.
Early last year, Gateway bought Irvine’s discount PC maker eMachines, which Inouye had brought back to life.
Gateway’s first-quarter earnings are due April 28. Gateway has said it expects to break even or post a small loss on sales of $810 million to $850 million.
Analysts had been expecting a slight profit on nearly $900 million in sales.
Interchange Correction
It was bound to happen to Interchange.
The online advertising and search company is finally trading below its offering price of $8 a share.
In fact, the company’s investors have been through quite a roller coaster ride in the past six months.
The company saw its shares shoot up 340% in the weeks following its offering, leading to a $200 million market value late last year.
But after a sharp correction in the past month or so, Interchange’s recent market value is about $60 million.
Earlier this month, the company’s president and chief operating officer, Michael Sawtell, said he was leaving the company.
Interchange said that Sawtell “agreed to resign.” The company said Sawtell’s resignation “was the result of strategic planning for the future growth of Interchange, and was not due to a disagreement with the company,” according to a release.
The catalyst for the stock drop was the company’s fourth-quarter earnings results. Interchange posted revenue of $5.9 million in the period, which fell short of Wall Street expectations.
And investors also were spooked by Interchange’s projection of lower-than-expected profits for the first quarter and 2005.
