WESTERN DIGITAL CORP NASDAQ: WDC ©2020 Argus Research Company Analyst Report Argus Western Digital produces DRAM-based hard disk drives (HDDs) along with non-volatile memory (NVM) products, including solid data drives (SSDs) and mobile memory. WDC's products are used in cloud and on-premises data centers, desktop & notebook PCs, enterprise storage, video surveillance, networking products, DVRs, point-of-sale devices, and set-top boxes. In May 2016, WDC acquired NAND flash leader SanDisk, expanding into the solid state drive (SSD) market, hybrid HDD-SSD solutions, and the storage systems business. Analyst's Notes Analysis by Jim Kelleher, CFA, August 7, 2020 ARGUS RATING: BUY • Pullback on weak guidance offers favorable entry point • Western Digital sold off after missing top-line expectations for fiscal 4Q20 and issuing below-consensus sales and adjusted EPS guidance for fiscal 1Q21. • We expect the digestion phase among data center customers to be a one- to two-quarter event. We also look for noncompute markets, such as video and point-of-sale, to stabilize as the impact of the pandemic begins to diminish. • We believe that WDC's long-term demand drivers, including cloud data center, SSDs for client and PC applications, and 5G, remain intact. • In our view, the recent underperformance of WDC shares offers an opportunity to initiate or increase positions in a premier memory player, which should begin to benefit from the developing 5G cycle as well as from the ongoing digital transformation of the economy. Our target price is $62. INVESTMENT THESIS BUY-rated, Focus List selection Western Digital Corp. (NYSE: WDC) fell 16% in a mixed market on 8/6/20 after the company missed top-line expectations for fiscal 4Q20 and issued below-consensus sales and adjusted EPS guidance for fiscal 1Q21. While the company is seeing pockets of demand strength, the formerly surging data center market may be entering a period of inventory digestion, according to the company. Western delivered strong double-digit revenue growth to close its June 2020 fiscal year, led by 32% growth in Data Center Devices & Solutions. Pandemic-related trends, including work & learn from home, virtual social interactions, and online gaming and video streaming continue to drive surging data traffic, increasing the need for both high-availability and archival storage solutions. Western Digital guided sharply below consensus for fiscal 1Q21 revenue, however, while signaling that data center demand may slow after several quarters of strong growth. Other parts of Western's business may also slow, including Client Devices, which is being Market Data Pricing reflects previous trading week's closing price. 200-Day Moving Average Price ($) 50 75 Closed at $43.10 on 7/31 52 Week Low: $36.50 52 Week High: $47.39 Target Price: $62.00 Target Price: $62.00 Rating EPS ($) 3.04 Quarterly Annual 1.45 Quarterly Annual 0.17 Quarterly Annual 0.17 Quarterly Annual 4.82 0.34 Quarterly Annual 0.62 Quarterly Annual 0.85 Quarterly Annual 1.23 Quarterly Annual 3.03 0.64 Quarterly Annual 0.71 Quarterly Annual 1.26 Quarterly Annual 1.36 Quarterly Annual ( Estimate) 3.97 1.34 Quarterly Annual 1.46 Quarterly Annual 1.61 Quarterly Annual 1.82 Quarterly Annual ( Estimate) 6.22 5.0 Quarterly Annual 4.2 Quarterly Annual 3.7 Quarterly Annual 3.6 Quarterly Annual 16.6 4.0 Quarterly Annual 4.2 Quarterly Annual 4.2 Quarterly Annual 4.3 Quarterly Annual 16.7 3.8 Quarterly Annual 4.0 Quarterly Annual 4.2 Quarterly Annual 4.5 Quarterly Annual ( Estimate) 16.5 4.7 Quarterly Annual 5.0 Quarterly Annual 5.2 Quarterly Annual 5.5 Quarterly Annual ( Estimate) 20.4 Revenue ($ in Bil.) FY ends Jun 30 Q1 Q2 Q3 Q4 Q1 2019 Q2 Q3 Q4 Q1 2020 Q2 Q3 Q4 Q1 2021 Q2 Q3 Q4 2022 BUY HOLD SELL Argus Recommendations Twelve Month Rating SELL HOLD BUY Five Year Rating SELL HOLD BUY Sector Rating Under Weight Market Weight Over Weight Argus assigns a 12-month BUY, HOLD, or SELL rating to each stock under coverage. • BUY-rated stocks are expected to outperform the market (the benchmark S&P 500 Index) on a risk-adjusted basis over the next year. • HOLD-rated stocks are expected to perform in line with the market. • SELL-rated stocks are expected to underperform the market on a risk-adjusted basis. The distribution of ratings across Argus' entire company universe is: 65% Buy, 34% Hold, 1% Sell. Key Statistics Key Statistics pricing data reflects previous trading day's closing price. Other applicable data are trailing 12-months unless otherwise specified Market Overview Price $37.00 Target Price $62.00 52 Week Price Range $27.40 to $72.00 Shares Outstanding 299.70 Million Dividend $0.00 Sector Overview Sector Technology Sector Rating OVER WEIGHT Total % of S&P 500 Market Cap. 27.00% Financial Strength Financial Strength Rating MEDIUM-HIGH Debt/Capital Ratio 50.1% Return on Equity 9.8% Net Margin -1.5% Payout Ratio -- Current Ratio 2.05 Revenue $16.74 Billion After-Tax Income -$250.00 Million Valuation Current FY P/E 9.32 Prior FY P/E 12.21 Price/Sales 0.66 Price/Book 1.16 Book Value/Share $31.87 Market Capitalization $11.09 Billion Forecasted Growth 1 Year EPS Growth Forecast 31.02% 5 Year EPS Growth Forecast 10.00% 1 Year Dividend Growth Forecast -100.00% Risk Beta 1.55 Institutional Ownership 80.87% Page 1 OF 6 Report created Aug 10, 2020 Please see important information about this report on page 6 WESTERN DIGITAL CORP NASDAQ: WDC ©2020 Argus Research Company Analyst Report Argus Analyst's Notes ...Continued hit by retail store closures. The lower revenue is also hurting operating leverage, leading management to issue 1Q21 adjusted EPS guidance that was well below consensus expectations. In May, Western Digital suspended its quarterly dividend in a move to maximize liquidity and cash on hand. The move came about two months after the hiring of David Goeckeler as CEO, which took effect on 3/9/20. Western's mix of NVM and DRAM products is similar to that of Micron, which does not pay a dividend. WDC management may have felt that keeping pace in two distinct memory technologies would require cash that would otherwise go to its dividend. We expect the digestion phase among data center customers to be a one- to two-quarter event. We also look for noncompute markets such as video and point-of-sale to stabilize as the impact of the pandemic begins to diminish. On the client side of the business, WDC's swing to SSD-based memory solutions bodes well for overall margins and growth going forward. Long-term demand drivers, including cloud data center, SSDs for client and PC applications, and 5G remain intact, supplemented by what we expect to be permanent behavioral changes amid the digital acceleration of the economy. As a result of the dividend cut and scaled-back guidance, WDC shares have underperformed the peer group and the overall stock market. However, we believe WDC's end markets are largely intact and expect any digestion phase in data center to be limited. In our view, the recent underperformance of WDC shares offers an opportunity to initiate or increase positions in a premier memory player, which should begin to benefit from the developing 5G cycle as well as from the ongoing digital transformation of the economy. We are reiterating our BUY rating to a 12-month target price of $62. WDC is appropriate for risk-tolerant investors apprised of the volatility in memory-sensitive equities. RECENT DEVELOPMENTS WDC is down 41% year to-date in 2020 versus a 13% decline for peers. WDC rose 72% in 2019 versus a 39% gain for the peer group of computing, information processing, and storage companies in Argus coverage. WDC declined 53% in 2018, versus a 15% pullback for peers. WDC stock rose 17% in 2017, slightly behind the 18% gain for peers. WDC rose 13% in 2016, just above the 12% peer-group gain. For fiscal 4Q20 (calendar 2Q20), Western Digital reported revenue of $4.29 billion, which was up 18% year-over-year and 3% sequentially. Revenue came in below the $4.35 billion midpoint of management's $4.25-$4.45 billion guidance range; revenue also lagged the consensus forecast of $4.35 billion. Non-GAAP earnings came to $1.23 per diluted share, up sixfold from $0.17 in the year-earlier quarter. The Street had been modeling $1.21; adjusted EPS also exceeded the $1.20 midpoint of management's $1.00-$1.40 guidance. In fiscal 3Q20, WDC delivered its first positive annual revenue comparison in seven quarters; although revenue grew more Growth & Valuation Analysis GROWTH ANALYSIS ($ in Millions, except per share data) 2015 2016 2017 2018 2019 Revenue 14,572 12,994 19,093 20,647 16,569 COGS 10,351 9,559 13,021 12,942 12,817 Gross Profit 4,221 3,435 6,072 7,705 3,752 SG&A 788 997 1,445 1,473 1,317 R&D 1,646 1,627 2,441 2,400 2,182 Operating Income 1,787 811 2,186 3,832 253 Interest Expense 35 240 821 616 412 Pretax Income 1,577 153 769 2,085 -287 Income Taxes 112 -89 372 1,410 467 Tax Rate (%) 7 — 48 68 — Net Income 1,465 242 397 675 -754 Diluted Shares Outstanding 237 242 296 307 292 EPS 6.18 1.00 1.34 2.20 -2.58 Dividend 1.80 2.00 2.00 2.00 2.00 GROWTH RATES (%) Revenue -3.7 -10.8 46.9 8.1 -19.8 Operating Income -5.2 -54.6 169.5 75.3 -93.4 Net Income -9.4 -83.5 64.0 70.0 — EPS -7.5 -83.8 34.0 64.2 — Dividend 44.0 11.1 Sustainable Growth Rate 9.6 3.8 7.4 -0.8 -4.8 VALUATION ANALYSIS Price: High $113.88 $72.01 $95.77 $106.96 $65.31 Price: Low $57.94 $34.99 $68.58 $33.83 $35.02 Price/Sales: High-Low 1.9 - 0.9 1.3 - 0.7 1.5 - 1.1 1.6 - 0.5 1.2 - 0.6 P/E: High-Low 18.4 - 9.4 72.0 - 35.0 71.5 - 51.2 48.6 - 15.4 — - — Price/Cash Flow: High-Low 13.7 - 7.0 9.8 - 4.7 7.0 - 5.0 8.6 - 2.7 17.5 - 9.4 Financial & Risk Analysis FINANCIAL STRENGTH 2017 2018 2019 Cash ($ in Millions) 6,354 5,005 3,455 Working Capital ($ in Millions) 6,712 6,182 4,660 Current Ratio 2.55 2.39 2.22 LT Debt/Equity Ratio (%) 113.1 95.3 102.8 Total Debt/Equity Ratio (%) 115.2 96.9 105.6 RATIOS (%) Gross Profit Margin 31.8 37.3 22.6 Operating Margin 11.4 18.6 1.5 Net Margin 2.1 3.3 -4.6 Return On Assets 1.3 2.3 -2.7 Return On Equity 3.5 5.9 -7.0 RISK ANALYSIS Cash Cycle (days) 33.5 42.4 63.2 Cash Flow/Cap Ex 5.9 5.0 1.8 Oper. Income/Int. Exp. (ratio) 1.9 4.1 0.4 Payout Ratio 149.3 41.2 119.1 The data contained on this page of this report has been provided by Morningstar, Inc. (© 2020 Morningstar, Inc. All Rights Reserved). This data (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. This data is set forth herein for historical reference only and is not necessarily used in Argus’ analysis of the stock set forth on this page of this report or any other stock or other security. All earnings figures are in GAAP. Page 2 OF 6 Report created Aug 10, 2020 Please see important information about this report on page 6 WESTERN DIGITAL CORP NASDAQ: WDC ©2020 Argus Research Company Analyst Report Argus Analyst's Notes ...Continued substantially in 4Q20 than in 3Q20, investors were not in a celebratory mood. Western Digital, which surprised the Street with a dividend suspension in May, again surprised investors with its fiscal 1Q21 guidance. The memory company provided midpoint revenue guidance of $3.8 billion, compared with prereporting consensus expectations of $4.36 billion. At management's guidance midpoint, revenue would be down 6% year-over-year, breaking the two-quarter string of positive annual comparisons, and down 11% sequentially. Off the sharply lower revenue base, management forecast midpoint non-GAAP EPS of $0.55 for 1Q21. Earnings at that level would still double the year-earlier tally, but the consensus came into the 4Q20 report anticipating guidance of $1.30-$1.35. Investors were aware that Western Digital was shepherding its cash. Additionally, Western's mix of NVM and DRAM products is similar to that of Micron, which does not pay a dividend. Investors were unprepared for the extent of downbeat guidance, however. Discussing the soft top-line outlook and specifically the data center market, management believes that the company is definitely entering a digestion phase. Western is coming off three very strong Exabyte shipments into the data center market, and demand signals from customers are down for the next one to two quarters. The noncompute market has specific challenges as well. Video-related sales are being impacted by shrinking global demand in this formerly fast growing niche; the slowdown could be driven by COVID-19. Retail, where WDC sells memory products for point-of-sale devices (cash registers), is not crashing but is operating at a reduced level. Finally, distributors are being cautious about inventory, further pressuring the company's outlook. New CEO David Goeckeler noted that Western Digital had successfully managed through an 'unpredictable time' with limited business impact from the pandemic. The company invested to overcome manufacturing and logistical challenges that were most acute in the hard drive business. Despite strong year-over-year revenue gains in client and data center markets, demand was mixed in the quarter amid ongoing customer uncertainty. While data center demand was driven by surging traffic from homebound workers and consumers, and the client SSD and HDD businesses benefited from spiking notebook PC sales, the noncompute business was impacted by lockdowns at many brick-and-mortar stores. Despite near-term headwinds, the company continues to invest in its NAND flash offerings. The CEO cited migration to flash within game consoles as yet another example of flash penetrating deeper into the edge and endpoint markets. WDC launched its 112-layer flash product, BiCS5, in retail applications in fiscal 4Q20. Prior-generation BiCS4 (96-layer) represented over 60% of bits shipped in fiscal 4Q. On the HDD side, the company is on track to ship its 18 Tb drive in the current quarter. WDC has maintained its partnership with the former Toshiba memory business, now known as Kioxia. During FY20, WDC shipped its first production wafers from its K1 fab, the new Peer & Industry Analysis The graphics in this section are designed to allow investors to compare WDC versus its industry peers, the broader sector, and the market as a whole, as defined by the Argus Universe of Coverage. • The scatterplot shows how WDC stacks up versus its peers on two key characteristics: long-term growth and value. In general, companies in the lower left-hand corner are more value-oriented, while those in the upper right-hand corner are more growth-oriented. • The table builds on the scatterplot by displaying more financial information. • The bar charts on the right take the analysis two steps further, by broadening the comparison groups into the sector level and the market as a whole. This tool is designed to help investors understand how WDC might fit into or modify a diversified portfolio. Value Growth P/E 5-yr Growth Rate(%) 9 10 10 12.5 15 17.5 MU MU MU MU MU STX STX STX STX STX WDC WDC WDC WDC WDC NTAP NTAP NTAP NTAP NTAP 5-yr Net 1-yr EPS Market Cap Growth Current Margin Growth Argus Ticker Company ($ in Millions) Rate (%) FY P/E (%) (%) Rating MU Micron Technology Inc. 54,161 10.0 17.1 11.2 85.3 BUY STX Seagate Technology PLC 11,645 10.0 8.9 9.6 10.8 BUY WDC Western Digital Corp. 11,089 10.0 9.3 -1.5 56.7 BUY NTAP NetApp Inc 9,499 9.0 13.6 15.1 41.0 HOLD Peer Average 21,598 9.8 12.2 8.6 48.4 P/E WDC vs. Market WDC vs. Sector More Value More Growth Price/Sales WDC vs. Market WDC vs. Sector More Value More Growth Price/Book WDC vs. Market WDC vs. Sector More Value More Growth PEG WDC vs. Market WDC vs. Sector More Value More Growth 5 Year Growth WDC vs. Market WDC vs. Sector More Value More Growth Debt/Capital WDC vs. Market WDC vs. Sector More Value More Growth Page 3 OF 6 Report created Aug 10, 2020 Please see important information about this report on page 6 WESTERN DIGITAL CORP NASDAQ: WDC ©2020 Argus Research Company Analyst Report Argus Analyst's Notes ...Continued manufacturing facility for 3D BiCS flash memory. Another highlight for the year was the ramp-up of WDC's enterprise SSD product line. In 4Q20, enterprise SSD revenue grew 70% sequentially; WDC's market share in this business is now in the double digits, according to management. For 4Q20, WDC's nonvolatile memory (NVM) revenue of $2.24 billion (52% of total) rose 49% year-over-year and 9% sequentially. Non-HDD revenue consists mainly of nonvolatile memory in various applications, including embedded (for smartphones) and removable (memory cards), as well as client and enterprise SSDs. NAND flash exabyte shipments rose 8% sequentially, marking a fourth straight quarter of sequential momentum and pointing to accelerating demand for NAND memory. HDD revenue of $2.05 billion (48% of total) fell 4% year-over-year and 3% sequentially. HDD unit shipments of 23.1 million decreased 17% year-over-year and 5% sequentially. HDD exabytes sold declined 2% sequentially. HDD ASP of $87 per drive was up 2% sequentially and 17% annually, reflecting a better mix of high-capacity drives for large commercial client markets (servers and desktop PCs), capacity enterprise, and cloud service providers. Consistent with the favorable ASP but unfavorable unit trend, HDD shipments in 4Q20 fell 24% in client compute HDDs and 25% in noncompute, but rose 10% in enterprise HDDs. In terms of customer categories served across both HDDs, SSDs, and other product categories, revenue from client devices & solutions (a combined 61% of total) was up 10% annually, led by record SSD shipments. Revenue from data center devices & solutions (39% of total) was up 32% year-over-year as enterprise SSDs continued to gain momentum and 14 Tb HDDs saw strong data center demand. We expect the digestion phase at data center customers to prove to be a one- to two-quarter event. We also look for noncompute markets such as video and point-of-sale to stabilize as the impact of the pandemic diminishes. On the client side of the business, WDC's swing to SSD-based memory solutions bodes well for overall margins and growth going forward. Long-term demand drivers, including cloud data center, SSDs for client and PC applications, and 5G remain intact, supplemented by what we expect to be permanent behavioral changes amid the digital acceleration of the pandemic economy. EARNINGS & GROWTH ANALYSIS For fiscal 4Q20 (calendar 2Q20), Western Digital reported revenue of $4.29 billion, which was up 18% year-over-year and 3% sequentially. Revenue came in below the $4.35 billion midpoint of management's $4.25-$4.45 billion guidance range; revenue also lagged the consensus forecast of $4.35 billion. The non-GAAP gross margin expanded sequentially to 28.9% in fiscal 4Q20 from 27.9% in fiscal 3Q20 and from 24.2% a year earlier. The non-GAAP operating margin widened to 12.3% from 10.2% in 3Q20 and from 4.4% a year earlier. Non-GAAP earnings came to $1.23 per diluted share in 4Q20, up sixfold from $0.17 in the year-earlier quarter. The Street had been modeling $1.21; adjusted EPS exceeded the $1.20 midpoint of management's $1.00-$1.40 guidance range. For all of FY20, revenue of $16.7 billion rose 1% from FY19. Non-GAAP diluted EPS totaled $3.03, down 37% from $4.82 in FY19. For fiscal 1Q21, Western forecast revenue of $3.7-$3.9 billion, compared to $4.04 billion a year earlier. At the guidance midpoint of $3.8 billion, revenue would be down 6% annually and 11% sequentially. WDC projected a non-GAAP gross margin of 25%-27%, operating costs of $700-$720 million, and non-GAAP EPS of $0.45-$0.65. At the guidance midpoint of $0.55, fiscal 1Q21 non-GAAP EPS would be up sharply from $0.34 a year earlier; however, the Street had been modeling a much higher $1.32. We are cutting our fiscal 2021 non-GAAP diluted EPS forecast to $3.97 from $6.18. We are setting an FY22 non-GAAP EPS forecast of $6.22. Our estimates are subject to revision. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating for WDC is Medium-High. The change in dividend policy has not resulted in a change in financial strength rating. In fiscal 2017, WDC paid in full its $3 billon bridge loan related to the SanDisk acquisition, reducing both cash and indebtedness by $3 billion. WDC also repaid its euro term loan B in full, and net debt decreased by $500 million in fiscal 4Q17. Cash was $3.05 billion at the end of fiscal 2020, reduced by debt repayments and buybacks. Cash was $3.49 billion at the end of FY19, $5.06 billion at the end of FY18, $6.39 billion at the end of FY17, $8.46 billion at the end of FY16, and $5.29 billion at the end of FY15. Debt was $9.58 billion at the end of fiscal 2020. Debt was $10.6 billion at the end of FY19, $11.3 billion at the end of FY18, $13.1 billion at the end of FY17, and $17.2 billion at the end of FY16. Prior to the SanDisk closing, debt was $2.57 billion at the end of FY15. Debt/cap was 50.1% at year-end FY20. Debt/cap was 50.9% at year-end FY19, 49.2% at the end of FY18, 54.3% at the end of FY17, 55.6% at the end of FY16, and 21.8% at the end of FY15. Cash flow from operations was $824 million in FY20. Cash flow from operations was $1.55 billion in FY19, $4.21 billion in FY18, $3.44 billion in FY17, $2.0 billion in FY16, and $2.3 billion in FY15. In September 2012, WDC announced a capital allocation program in which it pledged to return 50% of free cash flow to investors in the form of dividends and share buybacks. At that time, the board authorized a quarterly dividend of $0.25 per common share. In February 2015, WDC hiked its quarterly dividend to $0.50 per common share. In April 2020, WDC suspended its dividend with a plan to invest more cash in the business and further reduce indebtedness. The company paid a partial dividend of $1.50 per share in FY20. For now, we do not expect the company to pay a dividend in FY21 or FY22. MANAGEMENT & RISKS On 3/5/20, Western Digital appointed David Goeckeler as its new CEO, effective 3/9/20. Steve Milligan, who served as CEO since 2013, will remain in an advisory role until September 2020. Michael Cordano is the COO and Bob Eulau is CFO. CEO Goeckeler most recently served as EVP and GM of Cisco's Networking and Security business. We believe his deep engineering and business development strategy in these areas aligns with Western's swing away from the client (PC) market and to memory and mass storage markets in cloud, large enterprise, data center Page 4 OF 6 Report created Aug 10, 2020 Please see important information about this report on page 6 WESTERN DIGITAL CORP NASDAQ: WDC ©2020 Argus Research Company Analyst Report Argus Analyst's Notes ...Continued and carrier infrastructure. Cutting the dividend usually sends a message that a company has a strained cash situation or a fast-deteriorating operational outlook; WDC has neither. We believe the company eliminated its dividend so it could invest in its two main businesses of NVM and DRAM memory, and better compete with Micron. WDC also looks to reduce earnings volatility by reducing its interest payments on its debt. A main risk for Western Digital, as for other memory companies, is the possibility of a general economic downturn and a corresponding dip in demand for networking gear related to the pandemic. We believe that Western Digital has the financial strength, market leadership, and growth characteristics to weather this storm and emerge a stronger player. Further, it is serving multiple markets, including data center and compute, that are growing amid the shelter-at-home movement. Volatility in memory pricing was accentuated when WDC reported fiscal 4Q18 results. Pricing declines are the norm in the memory industry, and memory company stocks reprice based on the magnitude and pace of that decline. We believe that the long-term outlook for memory is favorable, but expect this niche to remain more volatile than technology stocks in general. The acquisition of SanDisk carried integration challenges, which have largely been met. We did not regard the deal as unduly expensive, priced at 3.2-times revenue and 10.6-times EBITDA. Other risks for Western Digital are largely related to conditions in the hard disk drive (HDD) market, which is highly volatile. Unexpected changes in end-user markets (PCs, servers, storage and consumer electronics) can hurt manufacturers' pricing and margin structures. Competition is fierce, not only from U.S.-based participants, but also from Asian providers. Going forward, we expect WDC to use cash generated from the structurally declining HDD market to fund its expansion into solid-state memory. COMPANY DESCRIPTION Western Digital produces DRAM-based hard disk drives (HDDs) along with non-volatile memory (NVM) products, including solid data drives (SSDs) and mobile memory. WDC's products are used in cloud and on-premises data centers, desktop & notebook PCs, enterprise storage, video surveillance, networking products, DVRs, point-of-sale devices, and set-top boxes. In May 2016, WDC acquired NAND flash leader SanDisk, expanding into the solid state drive (SSD) market, hybrid HDD-SSD solutions, and the storage systems business. VALUATION WDC shares are trading at 9.3-times our FY21 non-GAAP EPS estimate and at 5.9-times our projection for FY22. The average FY21-FY22 multiple of 7.6 is below the historical five-year average multiple of 9.9. Comparable historical valuation points to a value in the upper $60s, in a stabilizing trend and well above current levels. Peer indicated value in the mid-$60s suggests that WDC is undervalued at current prices. Discounted free cash flow valuation signals value around $130, also in a stabilizing trend. Blending these methods, we arrive at a fair value of approximately $107 per share, in a stable trend though much higher than current levels. Appreciation to our 12-month target price of $62 points to a risk-adjusted return that is much higher than our forecast return for the broad market. We continue to regard any weakness in WDC shares as a chance to build or initiate positions in a premier memory player. WDC is appropriate for risk-tolerant investors apprised of the volatility in memory-sensitive equities. On August 7, BUY-rated WDC closed at $36.99, down $0.31. Page 5 OF 6 Report created Aug 10, 2020 Please see important information about this report on page 6 METHODOLOGY & DISCLAIMERS NASDAQ: WDC ©2020 Argus Research Company Analyst Report Argus About Argus Argus Research, founded by Economist Harold Dorsey in 1934, has built a top-down, fundamental system that is used by Argus analysts. This six-point system includes Industry Analysis, Growth Analysis, Financial Strength Analysis, Management Assessment, Risk Analysis and Valuation Analysis. Utilizing forecasts from Argus’ Economist, the Industry Analysis identifies industries expected to perform well over the next one-to-two years. The Growth Analysis generates proprietary estimates for companies under coverage. In the Financial Strength Analysis, analysts study ratios to understand profitability, liquidity and capital structure. During the Management Assessment, analysts meet with and familiarize themselves with the processes of corporate management teams. Quantitative trends and qualitative threats are assessed under the Risk Analysis. And finally, Argus’ Valuation Analysis model integrates a historical ratio matrix, discounted cash flow modeling, and peer comparison. THE ARGUS RESEARCH RATING SYSTEM Argus uses three ratings for stocks: BUY, HOLD, and SELL. Stocks are rated relative to a benchmark, the S&P 500. • A BUY-rated stock is expected to outperform the S&P 500 on a risk-adjusted basis over a 12-month period. To make this determination, Argus Analysts set target prices, use beta as the measure of risk, and compare expected risk-adjusted stock returns to the S&P 500 forecasts set by the Argus Market Strategist. • A HOLD-rated stock is expected to perform in line with the S&P 500. • A SELL-rated stock is expected to underperform the S&P 500. Argus Research Disclaimer Argus Research Co. (ARC) is an independent investment research provider whose parent company, Argus Investors’ Counsel, Inc. (AIC), is registered with the U.S. Securities and Exchange Commission. Argus Investors’ Counsel is a subsidiary of The Argus Research Group, Inc. Neither The Argus Research Group nor any affiliate is a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. The Argus trademark, service mark and logo are the intellectual property of The Argus Research Group, Inc. The information contained in this research report is produced and copyrighted by Argus Research Co., and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Argus makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. In addition, this content is not prepared subject to Canadian disclosure requirements. This report is not an offer to sell or a solicitation of an offer to buy any security. The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Investing in any security or investment strategies discussed may not be suitable for you and it is recommended that you consult an independent investment advisor. Nothing in this report constitutes individual investment, legal or tax advice. Argus may issue or may have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the original date of publication. Argus is under no obligation to ensure that other reports are brought to the attention of any recipient of this report. Argus shall accept no liability for any loss arising from the use of this report, nor shall Argus treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Argus has provided independent research since 1934. Argus officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents and/or affiliates may serve as officers or directors of covered companies, or may own more than one percent of a covered company’s stock. Argus Investors’ Counsel (AIC), a portfolio management business based in Stamford, Connecticut, is a customer of Argus Research Co. (ARC), based in New York. Argus Investors’ Counsel pays Argus Research Co. for research used in the management of the AIC core equity strategy and model portfolio and UIT products, and has the same access to Argus Research Co. reports as other customers. However, clients and prospective clients should note that Argus Investors’ Counsel and Argus Research Co., as units of The Argus Research Group, have certain employees in common, including those with both research and portfolio management responsibilities, and that Argus Research Co. employees participate in the management and marketing of the AIC core equity strategy and UIT and model portfolio products. Morningstar Disclaimer © 2020 Morningstar, Inc. All Rights Reserved. Certain financial information included in this report: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. Page 6 OF 6 Report created Aug 10, 2020