Western Digital. January 31, 2010 Price: $33.94 Price Target: $ TMT Coverage

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1 LCDG Capital Student Research This report is published for educational purposes only by students competing in the Los Angeles Investment Research Challenge. TMT Coverage Western Digital January 31, 2010 Ticker: WDC Recommendation: BUY Price: $33.94 Price Target: $47.00 We initiate coverage on Western Digital (WDC) with a BUY rating. We believe that current valuations fail to capture WDC s transforming business model. We believe WDC s focus on higher value segments such as enterprise, consumer electronic, and retail branded as well as faster growth geographies like Asia has not been factored into the stock price. For investors looking for an undervalued growth stock with predictable volatility, Western Digital is a buy. Given our target price, this represents 38% upside potential. WDC s Profits and Valuation Fluctuate in Predictable 2 Year Cycles: Since Western Digital fully entered the modern hard drive market in 2003, profits and valuation have fluctuated in predictable 2 year cycles that operate as a function of product cycles in the overall computer and electronic sector. We believe that the hard drive industry is at the bottom of one of these predictable cycles, which will provide a catalyst for future growth. Western Digital will Successfully Transform its Business Model: Time and again Western Digital has successfully transformed its business model to adapt to its changing environment. WDC has successfully shifted its business model from making calculator semiconductors, to standalone PC hard drives, to multiple segments with a consumer brand. We believe that given WDC s managements experience WDC will reinvent itself in the face of the growth of solid state memory, cloud computing, and the changing use of traditional HDDs. Western Digital s Cost Structure is a Sustainable Competitive Advantage: WDC s position as a market leader allows it to achieve significant economies of scale unreachable to new market entrants. As a result, Western Digital is able to successfully cope with the falling price of memory and highly cyclical demand. This ensures that WDC continues to provide stable cash flows to finance capital expenditures or acquisitions. Higher Value Products will Dominate WDC s Product Mix: We believe that enterprise hard drives, consumer electronic and media drives, and branded products will grow in WDC s product mix. Focusing on these higher value product lines will allow WDC to continue growth in the face of declining ASPs and demand for traditional HDDs for desktop and notebooks. Asia s Share of Revenues will Grow (and Grow Revenues): While the memory market is saturated in developed markets, it is rapidly growing in emerging markets, particularly Asia. Demand across all product lines will fuel WDC s profits as the world emerges from recession. Important disclosures appear at the back of this report

2 Southern California Investment Research Challenge Student Research January 31, 2010 Investment Summary We believe that Western Digital is a buy based on its current valuation due to depressed valuations from the current product cycle and the market s under pricing of WDC s growth potential. Western Digital is at the Bottom of a 2 Year Valuation Cycle. WDC is a company that is part of an industry that is subject to a contraction/ expansionary cyclicality and has historically been measurable in 24 month intervals from trough to trough of the cycle. The company though is also currently trading at a deeply discounted EBITDA multiple. The company is currently at the bottom of one of these cyclical troughs; and is simultaneously moving into both higher growth markets and shifting towards higher growth geographies. Couple this momentum with a severely set of discounted enterprise value multiples, and this represents a unique opportunity to be a part of this value growth play at a significant buying discount Western Digital has Consistently Successfully Revolutionized its Business Model On multiple occasions in the company s history WDC has innovated to adjust to the changing hard drive environment. Historically following these innovations WDC s growth and valuation have increased. 1. The company comes out of bankruptcy and refocuses its efforts from making calculator chips to computer hard drive controllers. 2

3 CFA Los Angeles Investment Research Challenge Student Research January 31, The company makes the landmark purchase of Tandon and begins constructing its own hard drives, a departure from its previous business model. 3. Western Digital begins making multiple HDD models. 4. Western Digital begins offering larger memory sizes, different processing speeds, branded products, and consumer electronic products. 5. Western Digital enters the enterprise market. This Time will be no Exception We expect Western Digital to redefine its business model and adjust to the rapidly changing memory landscape. We believe that WDC has the potential to not only retain its leadership in the traditional computer hard drive markets but also establish itself as a leader in the branded, consumer electronic and media, and enterprise hard drive markets. Additionally, we believe that WDC will be able to not only establish its own line of solid state memory drives, but also innovate its products to ensure that HDDs will have a place in the storage of the future. Business Description Throughout its thirty-year history, Western Digital (WDC) has been a story of innovation, undergoing constant reinvention to keep pace with the dynamic tech industry. Founded in 1970, WDC s initial focus was semiconductors and electronic calculators, and while they struggled in early years, they were able to take advantage of technological advancements to emerge from bankruptcy and become a profitable leader in the data storage industry. WDC first began manufacturing hard drives in 1988 and began introducing new and innovative products to the market. They focused on serving customer segments with unique needs such as the corporate network computer market and entered the business intelligence market. As customer demands and technological capabilities changed, WDC continued to alter their existing products and offer new ones. To assist in this constant adaptation, WDC has used acquisitions as a key tool to keep up with the tech industry. These acquisitions have been used to enter new markets as well as consolidate processes and allow for vertical integration. This can be seen most recently in WDCs entry to the solid-state drive (SSD) market and their acquisition of SiliconSystems. Another way WDC has stayed innovative is through the divestiture of segments that are no longer relevant to ensure profitability and a strong ability to compete. Management has Decades of Successful Experience A key ingredient to WDC s ability to remain current has been their strong management team. The majority of the key management figures have been with the firm for over ten years, most of them since the 1990s when WDC first entered the hard drive business. Management clearly knows what it takes to remain competitive in this industry and how to successfully transition into new products. This shows that WDC should be able to continue this track record and successfully take advantage of the opportunities in the SSD market, as well as changes in the HDD market. Industry Overview and Competitive Positioning The Exponential Growth of Information Drives HDD Growth Growth in information, especially the Internet, across the globe will promote the sales of storage equipment. Industry trends show us companies and consumers want to have the most information possible at the fastest possible speed. Given this exploding demand, shipments of hard disk drives were up 13% in 2010 from 2009 to $34 billion. Demand for external hard drives in consumer electronics is also increasing in the short term because of more data used in gaming, music, videos and expanding multimedia features on PCs. Emerging Markets will Continue to Provide Demand for Traditional HDD Products Worldwide unit PC shipments were up 2.8% in 2009 and 8.8% in 2010 and will continue to increase. This growth will continue because of improvement in the economy as well as the growth of wealth of emerging markets. For example, the growth of desktops is increasing in China because they are a status symbol in the country. With the increase of shipments for PC s in the short term, the demand for hard drives will also increase. Enterprise Demand is Strengthening Enterprise demand for hard drives is increasing. Companies with excess cash and are increasing their information technology capital expenditures, which involves upgrading hard disks. As a result, many 3

4 CFA Los Angeles Investment Research Challenge Student Research January 31, 2011 companies are switching to the 2.5 hard drives in data centers to achieve cost reductions and increase efficiency. Hard drive shipments are expected to be 52.6 million units by 2014, an increase of 12.1 million shipments from Most of this increase is due to increased demand from cloud services. With companies like Google and Microsoft focusing on cloud services, there will be more demand for hard drives in the enterprise business, which will create a long term growth market for traditional HDDs. Solid State Drive Market not Clearly Defined The solid state market, while small, is rapidly growing. In 2011 it is estimated that the nascent market will roughly double in size and grow 111.6%. The role of SSDs in the total memory market remains to be seen. While expensive, they are comparatively lighter and use less energy than HDDs. Contrastingly, SSDs hold less memory than traditional HDDs. Given these factors, the SSD market is growing and competitive firms in the HDD space are adapting their business strategies accordingly. Average Selling Prices are Uniformly Decreasing In the coming years the low selling price of hard disk drives will offset the growing volume of shipments. Industry wide hard drive volume is projected to be 700 million units in This will put pressure on ASPs given that demand is not recovering as quickly as supply is increasing. This means that effective manufactures will need effective cost structures to remain competitive. The Industry is no Longer Consolidating In 2010, the storage industry experienced an intense consolidation period. Large companies such as EMC and Dell purchased smaller storage companies in order to vertically integrate their storage offerings. As a result, the industry is dominated by several major players. In order to compete, these players must offer a full array of products and have a competitive cost structure. Competitor Analysis Western Digital s competitors are primarily other manufacturers of hard disk drives (HDDs) for use in desktop, notebook, enterprise, consumer electronics and external storage products. However, as the firm gradually expands its business into the solid state drives (SSDs) market, WDC will be facing intense competition from that field as well. Another area where competition is likely to arise is Cloud Computing, which has the potential of cannibalizing into the HDD market due to its high growth rate. The major competitors of Western Digital include the other pure-play manufacturer, Seagate Technology Inc., and conglomerates such as Hitachi Global Storage Technologies, Samsung Electronics and Toshiba Corporation. Seagate Technology: Inferior to WDC The most significant threat comes from Seagate Technology. As the only other vertically integrated manufacturer focusing on HDD sales, Seagate Technology is currently the leader in the industry based on revenue and is competing directly with WDC in all market segments. It provides a wide spectrum of disk drive products targeting enterprise servers, computing applications, portable external storage systems and digital media systems. Seagate dominates both the Enterprise market and the Desktop market by capturing 60% and 40% of the market shares, respectively. It also has 20% market share in the mobile computer and 4

5 CFA Los Angeles Investment Research Challenge Student Research January 31, 2011 consumer electronics computer. Most notably, Seagate has been strongest in the high margin Enterprise market, where WDC just made its entrance. The high substitutability of hard drive products has, nevertheless, increased the possibility for WDC to capture the established market share of Seagate in traditional segments. We believe that WD could leverage its reputation of high quality products as well as its lower ASP (average selling price) derived from a competitive cost structure to increase the number of units sold, and thus gain more market share from either Seagate or other competitors. Additionally, comparing ROE between the two firms shows us that WDC has a more consistent history of high returns for shareholders and profitability. Conglomerate competitors: Diversified but Lacking Innovation WDC is also facing threats from large conglomerates that manufacture diversified electronics products. Business lines of these companies range from mobile phones to home appliances. Their diversified product portfolios allow them to rely less on the profits derived from HDDs, and thus offer their products at lower margins in order to advance overall profitability. In addition, these conglomerates do possess the ability to defend their market shares, if not to expand them, through their access to abundant resources and ability to offer integrated solutions to customers. Toshiba and Samsung are especially well positioned in the new market segments such as NAND flash memory and SSD markets (Samsung owns 40 percent and 32 percent in the NAND and SSD segments, respectively). Their dominance could create significant obstacles to the expansion of WDC. On the other hand, the conglomerates widely spread focus weakened their ability to excel in the production of HDDs, resulting in lower market shares and limited segment involvement. We believe that WDC s unyielding attention on the storage market makes it possible for it to surpass the conglomerates with higher product quality and faster technology updates. We thus foresee strong growth coming from winning market shares of these players. WDC s Brand Name, Innovation, and Reputation for Excellence will Propel Growth The intensive competition did not prevent WDC to establish prominent brand name and market position through high performing products. Its overall market share has grown from 12 to 30 percent over the past 10 years. WDC has been maintaining a competitive cost structure which allows it to remain profitable despite the downward pricing pressure. It also hedges out risk through construction of a diversified product portfolio as well as expansion into the SSD segment, consumer electronics segment and software development. Industry Consolidation helps Western Digital Gain Market Share On the up side, WDC s competitors have been decreasing due to the difficulty to keep up with technological advancement as well as increasing industry consolidation. However, the industry s consolidation trend also poses a threat to WDC as its competitors have been achieving market share growth through M&A activities: for example, Seagate acquired Maxtor Corporation in 2006 while Toshiba acquired Fujitsu Limited s hard disk drive business in

6 CFA Los Angeles Investment Research Challenge Student Research January 31, 2011 Western Digital s Markets are Highly Competitive Competitor Threat Reason Established market leader which directly competes with WDC in all segments Lost market share recently but still a significant player; gained entrance into the branded products segment through acquisition Lacks focus on HDD market but well positioned in SDD segment Manufacture products in data storage area and media player Grew its market share through acquisition of Fujitsu s HDD business Major player in SDD segment but no representation in HDD market = High Threat = Medium Threat = Low Threat Solid State Drives Pose a Mixed Threat The flash-memory based SSD has multiple advantages over traditional HDDs, such as higher performance with lower floor space, power consumption, noise, access time, susceptibility to physical shock and relatively low cost. As a result it has been preferred by certain industries that demand high performance. Nevertheless, despite the low cost per gigabit of flash-based SSDs, its aggregate selling price is still much more expensive compared to the spinning-disk based HDDs, which prevented its adoption by the massive storage consumers. We believe that the HDDs place will not be replaced by SSDs in the next decade due to continuous downward pricing pressure in the HDD market and the relatively high expense of SSD. However, we foresee SSD making its roads into the storage market especially the enterprise market where high performance is preferred, potentially as complements of HDDs. Currently this market is dominated by Samsung which has 32% of the market share, followed by STEC with 16% market share. Nevertheless, WDC has already initiated manufacturing of SSD lines, and we believe the ten years transition period would allow it to fully leverage its brand name and strength in R&D to capture a competitive market share in the SSD segment. Cloud Computing is a Market Opportunity The development of Cloud Computing technology is a potential threat for players in the HDD market, as this technology will potentially erode the current HDD market. Cloud Computing delivers virtualized storage space on demand over a network, which excludes the transportation issue of traditional storage devices and allows for flexible pricing. From our perspective, Cloud Computing will likely reduce the size of the storage market as well as the demand for stand-alone hard drives. However, demand from the corporations that provide the cloud computing services will open up tremendous opportunities for WDC s RAID edition hard drive (enterprise segment), which combines multiple disk drive components into one logical unit to allow for increased storage functions. 6

7 CFA Los Angeles Investment Research Challenge Student Research January 31, 2011 Valuation Summary To arrive at our target price we employed a discounted cash flow and comparable companies analysis. Given the different valuation ranges from each method, we believe that $47.00 is an appropriate target price for the security. Comparable Companies Suggest WDC Demands a Higher Valuation When selecting comparable companies, similarity in business lines was our first criteria, followed by market capitalization. Some of WDC s competitors were not chosen as comparables due to their features as conglomerates. The market comparable group was made up of two groups: Computer storage & Peripherals and a pure-play group of hard drive manufacturers. The first group consisted of six firms as briefly described below: Seagate Technology Direct competitor with WDC. Designs, manufactures, markets, and sells hard disk drives for the enterprise, client compute, and client non-compute market applications in the United States and internationally. STEC, Inc. Major player in the SSD segment. Designs, manufactures, and markets enterprise-class flash solid-state drives (SSDs) for use in high-performance storage and server systems. SanDisk Corporation - Data storage product used in consumer electronics segment Designs, develops, manufactures, and markets NAND-based flash storage card products that are used in various consumer electronics products. EMC Corporation - Direct competitor in both external hard drive and media player retail market. Develops, delivers, and supports information infrastructure and virtual infrastructure technologies and solutions. Micron Technology, Inc.- Data storage products targeting similar consumer segments. Together with its subsidiaries, engages in the manufacture and marketing of semiconductor devices worldwide. Its products include dynamic random access memory (DRAM) products that provide data storage and retrieval. By looking at the comparable EV/EBITDA, EV/EBIT, EV/Revenue multiples from each comparable company we believe that given Western Digital s superior business model, WDC s current stock price represents a significant discount to its true value. 7

8 CFA Los Angeles Investment Research Challenge Student Research January 31, 2011 Financial Analysis To arrive at our target price, in addition to using a comparable companies analysis, we used a five year discounted cash flow model. We chose a five year forecast period in order to capture the effects of the hard drive industry cycle on WDC s cash flows. Enterprise, Consumer Electronic, and Branded will Provide Strong Product Segment Growth We believe that these three segments will provide double digital revenue growth over the next five years. As more and more consumers need space to store their downloaded and recorded media at home, on the go, and at work, sales in these product segments will grow. These product lines will grow from being 24% of current sales to 38% of sales in Asian Growth will keep Desktop and Notebook Demand Stable While notebook and desktop demand will remain flat in the Americas and EMEA over the next five years, we project that demand across all product lines will grow on average 10% per year over our forecast period in Asia. We believe that Asia s, particularly China s, strong recovery along with China s growing middle class will help ensure robust demand across all product lines. Average Selling Prices will Continue to Fall Over the next five years we project that ASPs will fall at a CAGR of -5%. The exponential growth of memory capacity will drive memory prices down along with decreased demand for notebook and desktop HDDs. Additionally, the growth of solid state memory will offset demand for traditional HDDs, which will put pressure on prices. 8

9 CFA Los Angeles Investment Research Challenge Student Research January 31, 2011 WDC s Cost Structure will Improve over Time We believe that WDC s efforts to vertically integrate its HDD component product process along with its new attempts to implement a production process that is more responsive and flexible to industry demand will improve profitability over out five year forecast period. We project that both top cycle margins along with bottom cycle margins will improve when compared to the past. We Believe Management will Deliver on CAPEX, Capital Structure, and Tax Rate Forecasts Capital Expenditures: We project capital expenditures to be 7.5% of sales over our five year forecast period. This is not only consistent with management s guidance, but also consistent with historical CAPEX which have averaged around 7.5%. Capital Structure: We assumed that WDC would continue to pay back its 5 year credit facility in a timely manner and retire the facility in Tax Rate: We assumed that during our forecast period WDC s tax rate would stay constant as 9%. Tax holidays in countries like Malayasia do not expire until 2022 and we believe WDC will continue to benefit from the US government s R&D tax credits. Western Digital will Return ROE Consistent with its Hardware Cycles We estimate that Western Digital will continue to deliver strong ROE for its shareholders consistent with 2 year industry cycles. Asset turnover declines in our model due to PPE and cash accumulation. Profit margins, however, will consistently grow through cycles. 9

10 CFA Los Angeles Investment Research Challenge Student Research January 31, 2011 Investment Risks Asian growth is not as robust as we anticipate. Many factors such as Chinese inflation, rising wages, asset bubbles, and geopolitical instability could threaten Asia s strong recovery. If Asian growth is not a robust as we believe, our investment thesis is substantially threatened. ASPs fall at a faster rate than anticipated. If demand for notebook and desktop computers in the United States and EMEA does not stabilize and continues to fall ASPs could fall at a rate faster than our forecast. As a result, WDC s margins and revenue will substantially decline. Solid state storage replaces HDD as the primary storage medium. If solid state storage becomes a more cost effective and efficient storage medium than hard disk drives, WDC s market for HDDs will substantially shrink with detrimental effects on WDC s revenues. WDC fails to establish itself in the SSD market. The SSD market is highly competitive and WDC is a late-mover in this market. As a result, WDC may not be able to establish itself in this rapidly changing market. Failure to do so will substantially jeopardize WDC s long term growth prospects. Western Digital loses its preferential tax treatment. We estimate WDC s preferential tax treatment in countries like Malaysia adds roughly $0.43 per share in FY2011. If political or economic factors induce rises in tax rates and a suspension of WDC s tax holidays, earning will be substantially affected. Loss of a key customer. WDC s top ten customers account for over half of the firm s revenue. If WDC loses one of these contracts or if one of these customers business is threatened, WDC s revenue and ability to collect accounts receivable will be endangered. Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report do not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report do not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serves as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company s securities. Ratings guide: Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months. Investment Research Challenge and Global Investment Research Challenge Acknowledgement: CFA Los Angeles Investment Research Challenge as part of the CFA Institute Global Investment Research Challenge is based on the Investment Research Challenge originally developed by the New York Society of Security Analysts. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Los Angeles, CFA Institute or the Global Investment Research Challenge with regard to this company s stock. 10

11 Business Description Western Digital Corporation primarily engages in the design, development, manufacture, and sale of hard drives worldwide. It offers hard drives, including 3.5-inch and 2.5-inch form factor drives under the WD Caviar, WD RE, WD VelociRaptor, WD Scorpio, WD Elementstm, WD AV, WD ShareSpacetm, WD S25, My Passport, My Book, and My DVR Expander brand names. The company s hard drives are used in desktop computers, notebook computers, enterprise storage products, servers, workstations, video surveillance equipment, networking products, digital video recorders, satellite and cable set-top boxes, and external storage appliances. It also offers hard drives as stand-alone storage products for personal data backup, and portable or expanded storage of digital music, photographs, video, and other digital data. In addition, the company provides solid-state drives under the SiliconDrive and SiliconEdge brand names for use in the embedded systems and client PC markets; and media players under the WD TV brand name. It offers its products to original equipment manufacturers and original design manufacturers, as well as to distributors, resellers, and retailers. The company was founded in 1970 and is headquartered in Irvine, California. Competition The company s competitors in the hard drive market include companies such as Hitachi Global Storage Technologies, Samsung Electronics Co. Ltd., Seagate Technology and Toshiba Corporation. The company s competitors in the external hard drive market include companies such as EMC Corporation, Hitachi Global Storage Technologies, LaCie S.A., Melco Holdings Inc. and Seagate Technology. The company s competitors in the solid-state drive market include Intel Corporation, Micron Technology, Inc., Samsung Electronics Co. Ltd., Smart Modular Technologies, Inc. and STEC, Inc. The company s competitors in the media player retail market include companies such as Apple Inc., EMC Corporation, LaCie S.A., Roku, Inc. and Seagate Technology.

12 Western Digital Corp. Summary of Value - Market Approach Valuation as of 01/31/2011 $ in Millions Except as Indicated Value Range Average Weights Values EV/Rev EV/EBITDA EV/EBIT Market Approach - Guideline Public Company Method - Comp set 1 12,667 5,424 7,756 8, % 7,754 Market Approach - Guideline Public Company Method - Comp set 2 5,889 5,424 5,714 5, % 568 Business Enterprise Value - Marketable, Controlling Basis 8,322 Add: Cash 2,858 Less: Interest Bearing Liabilities 375 Less: Preferred Stock - Less: Minority Interest - Total Common Equity Value 10,805 Divided by: # of Shares outstanding Price per Share $ 46.63

13 Western Digital Corp. Market Approach - Comparable Company Multiples Valuation as of 01/31/2011 $ in Millions Except as Indicated Company Information Market Data Market Multiples Comp Set - Computer Storage & Peripherals Stock Price as a Multiple of EV as a Multiple of Company Name Ticker Stock Shares Market Total Beta Effective Beta Debt/ LTM Cash LTM LTM LTM f Shares Outstandin BV LTM LTM LTM Symbol Price Outstanding Cap Debt Tax Unlevered Equity Rev. EBITDA EBIT Adj EPS VD Per Share EBITDA EBIT Revenue Seagate Technology PLC STX $ $ 6,508.4 $ 2, NM % $ 11,122.0 $ 2,528.0 $ 2,166.0 $ 1, x x 3.1x 4.7x 0.60x SanDisk Corp. SNDK , , % % 4, , , x x 5.8x 6.7x 2.04x EMC Corporation EMC , , , % % 17, , , , x x 12.5x 17.8x 2.90x STEC, Inc. STEC , % % x x 16.1x 20.8x 3.06x Micron Technology Inc. MU $ $ 10,341.9 $ 1, % % $ 8,994.0 $ 2,411.0 $ 3,829.0 $ 1, x x 3.0x 6.4x 1.28x Highest $ 50,438.5 $ 3, % % $ 17,015.1 $ 4,119.1 $ 3,933.8 $ 2, x x 3.5x 16.1x 20.8x 3.1x Lowest 1, % % x 50.9x 1.3x 3.0x 4.7x 0.6x 25th Percentile 6, , % % 4, , , x 234.5x 2.1x 3.1x 6.4x 1.3x 75th Percentile 10, , % % 11, , , , x 997.3x 2.9x 12.5x 17.8x 2.9x Mean 15, , % % 8, , , , x 762.9x 2.4x 8.1x 11.3x 2.0x Median $ 10,341.9 $ 1, % % $ 8,994.0 $ 2,411.0 $ 2,166.0 $ 1, x 471.6x 2.3x 5.8x 6.7x 2.0x Western Digital Corp. WDC $ $ 7,862.8 $ % % $ 9,894.0 $ 3,110.0 $ 1,775 $ 1, x x 2.9x 4.2x 0.52x Western Digital Corp. Implied EV EV/REV $ 12, EV/EBITDA $ 5, EV/EBIT $ 7, Notes: * Enterprise Value equals the sum of the market value of common equity, the book value of total debt, preferred stock, and minority interest and minus cash & cash equivalent. LTM = Latest twelve months; BV = Book Value; NM = Not meaningful; NA = Not applicable or available. Comparable company financials have been adjusted for special items. Source: Capital IQ, Inc. Pure Play - Hard Drive Manufacturer Stock Price as a Multiple of EV as a Multiple of Company Name Ticker Stock Shares Market Total Beta Effective Beta Debt/ LTM Cash LTM LTM LTM f Shares Outstandin BV LTM LTM LTM Symbol Price Outstanding Cap Debt Tax Unlevered Equity Rev. EBITDA EBIT Adj EPS VD Per Share EBITDA EBIT Revenue Seagate Technology PLC STX $ $ 6,508.4 $ 2, NM % $ 11,122 $ 2,528.0 $ 2,166 $ 1, x x 3.1x 4.7x 0.60x Mean 3.1x 4.7x 0.60x Western Digital Corp. WDC $ $ 7,862.8 $ % % $ 9,894.0 $ 3,110.0 $ 1,775 $ 1, x x 2.9x 4.2x 0.52x Western Digital Corp. Implied EV EV/REV $ 5, EV/EBITDA $ 5, EV/EBIT $ 5,713.54

14 Western Digital Corp. Market Approach - Comparable Company Growth and Margin Valuation as of 01/31/2011 Company Information Growth Rates Margin Analysis Return Analysis Company Name Ticker LTM 3-yr. CAGR LTM 3-yr. CAGR LTM 3-yr. Avg. LTM Adj Net 3-yr. Avg. Adj LTM 3-yr. Avg. LTM 3-yr. Avg. Symbol Revs. Revs. EBITDA EBITDA EBITDA EBITDA Income Net Income ROE ROE ROA ROA Seagate Technology PLC STX 9.1% -3.2% 37.4% -2.0% 19.5% 21.5% 6.9% 8.3% 46.8% 61.3% 10.9% 13.7% SanDisk Corp. SNDK 35.3% 7.4% 125.1% 37.4% 35.0% 33.9% 18.9% 17.8% 26.8% 25.9% 12.4% 12.5% EMC Corporation EMC 21.3% 8.7% 66.0% 16.4% 23.1% 20.1% 9.9% 8.7% 11.5% 10.1% 6.0% 5.3% STEC, Inc. STEC -4.2% 11.7% -21.9% 35.2% 19.0% 25.0% 9.3% 13.3% 12.9% 22.5% 8.5% 15.7% Micron Technology Inc. MU 74.9% 16.5% 140.8% 48.3% 42.6% 42.2% 11.1% 7.7% 26.8% 20.3% 8.5% 6.1% Western Digital Corp. WDC 18.5% 13.6% 15.5% 20.5% 17.9% 19.7% 7.6% 8.9% 23.8% 31.2% 10.5% 13.5% Highest 74.9% 16.5% 140.8% 48.3% 42.6% 42.2% 18.9% 17.8% 46.8% 61.3% 12.4% 15.7% Lowest -4.2% -3.2% -21.9% -2.0% 19.0% 20.1% 6.9% 7.7% 11.5% 10.1% 6.0% 5.3% 25th Percentile 9.1% 7.4% 37.4% 16.4% 19.5% 21.5% 9.3% 8.3% 12.9% 20.3% 8.5% 6.1% 75th Percentile 35.3% 11.7% 125.1% 37.4% 35.0% 33.9% 11.1% 13.3% 26.8% 25.9% 10.9% 13.7% Mean 27.3% 8.2% 69.5% 27.1% 27.8% 28.6% 11.2% 11.1% 25.0% 28.0% 9.3% 10.7% Median 21.3% 8.7% 66.0% 35.2% 23.1% 25.0% 9.9% 8.7% 26.8% 22.5% 8.5% 12.5%

15 Western Digital Corp. Projections Valuation as of 01/31/2011 Revenue (all figures in millions USD) FY-2007 FY-2008 FY-2009 FY-2010 Q Q Q3-2011E Q4-2011E FY2011E FY2012E FY2013E FY2014E FY2015E Total HDD Units ASP $ $ $ $ $ $ $ $ $ $ $ $ $ Growth Rate 3.95% % -1.96% 2.17% -5.00% -4.50% -2.19% -1.25% -4.50% -0.75% -6.50% Total HDD Revenue $ 5,468 $ 8,074 $ 7,453 $ 9,850 $ 2,396 $ 2,475 $ 2,440 $ 2,436 $ 9,747 $ 10,252 $ 10,496 $ 11,151 $ 11,068 Growth Rate 48% -8% 32% 3% -1% 0% -1% 5% 2% 6% -1% Other Revenue Total Revenue (Incl. Other) $ 5,468 $ 8,074 $ 7,453 $ 9,850 $ 2,396 $ 2,475 $ 2,526 $ 2,524 $ 10,005 $ 10,688 $ 10,985 $ 11,678 $ 11,617 Unit Sales by Geography Americas Notebook Growth Rate % 16.83% 47.48% 0.28% 4.50% 2.15% -3.88% 1.80% 1.30% 1.10% 0.90% Desktop Growth Rate % % 26.46% -6.67% 2.40% 2.20% -2.29% 1.80% -0.50% -1.20% -1.60% Enterprise Growth Rate 15.52% % 90.27% -5.79% 48.00% 61.00% 45.22% 32.00% 27.00% 23.00% 15.00% Consumer Electronic Growth Rate 20.23% % 12.52% % 3.10% 3.50% 7.59% 17.00% 12.00% 8.00% 6.00% Branded Growth Rate 35.26% -0.30% 19.69% 25.12% 4.20% 3.80% 25.22% 6.50% 5.10% 4.80% 4.30% Total Americas EMEA - Notebook Growth Rate % 35.81% 25.63% 13.96% 4.50% 2.15% 10.66% 1.80% 1.30% 1.10% 0.90% Desktop Growth Rate 11.05% % 7.73% 6.06% 2.40% 2.20% 12.26% 1.80% -0.50% -1.20% -1.60% Enterprise Growth Rate 42.63% % 62.08% 7.06% 33.00% 41.00% 49.39% 19.00% 21.50% 18.00% 10.00% Consumer Electronic Growth Rate 48.45% -8.78% -4.15% -2.30% -1.50% 0.25% 19.64% 1.30% 1.80% 1.10% 1.90% Branded Growth Rate 67.01% 15.91% 1.95% 42.18% 1.80% 1.70% 42.19% 6.50% 4.80% 4.50% 4.30% Total EMEA

16 Western Digital Corp. Projections Valuation as of 01/31/2011 Revenue (all figures in millions USD) Asia FY-2007 FY-2008 FY-2009 FY-2010 Q Q Q3-2011E Q4-2011E FY2011E FY2012E FY2013E FY2014E FY2015E Notebook Growth Rate % 89.59% 59.52% 2.90% 4.85% 2.35% 4.44% 6.50% 7.30% 7.80% 8.50% Desktop Growth Rate 23.13% 14.70% 36.79% -4.23% 1.90% 1.50% 5.44% 2.80% 3.20% 4.50% 4.10% Enterprise Growth Rate 58.15% 9.49% % -3.33% 33.00% 33.00% 37.27% 54.00% 43.00% 37.00% 23.00% Consumer Electronic Growth Rate 64.60% 27.35% 21.70% % 3.10% 3.50% 16.56% 19.00% 15.00% 9.00% 7.50% Branded Growth Rate 85.18% 61.81% 29.46% 28.38% 4.20% 3.80% 35.90% 16.00% 15.50% 12.50% 11.20% Total Asia Geographic Mix Americas 37% 31% 24% 24% 23% 22% 22% 22% 22% 22% 21% 21% 20% EMEA 29% 30% 27% 23% 23% 25% 25% 25% 24% 23% 22% 21% 20% Asia 34% 39% 49% 53% 54% 53% 53% 53% 53% 54% 56% 58% 60% Total Sales Notebook Desktop Enterprise Consumer Electronic Branded Total Units Sold Product Mix Notebook 9% 23% 32% 35% 33% 33% 33% 33% 33% 32% 31% 31% 30% Desktop 67% 52% 43% 41% 41% 39% 38% 37% 39% 37% 35% 33% 32% Enterprise 4% 4% 3% 4% 5% 4% 6% 8% 6% 7% 9% 11% 13% Consumer Electronic 11% 11% 10% 9% 10% 9% 9% 9% 9% 10% 10% 10% 10% Branded 9% 10% 12% 11% 11% 14% 14% 14% 13% 14% 14% 15% 15% Other Non- HDD Revenue Other Growth Rate -72% 108% 2.5% 2.0% 119.2% 27.5% 12.3% 7.5% 4.2%

17 Western Digital Corp. Projections Valuation as of 01/31/2011 Income Statement (all figures in millions USD) FY-2007 FY-2008 FY-2009 FY-2010 Q Q Q3-2011E Q4-2011E FY-2011E FY-2012E FY-2013E FY-2014E FY-2015E Total Revenues $ 5,468 $ 8,074 $ 7,453 $ 9,850 $ 2,396 $ 2,475 $ 2,526 $ 2,524 $ 10,005 $ 10,688 $ 10,985 $ 11,678 $ 11,617 Cost of Goods Sold 4,568 6,335 6,116 7,449 1,959 2,000 2,185 2,158 8,302 8,337 9,063 9,062 9,584 Gross Margin 900 1,739 1,337 2, ,703 2,351 1,922 2,616 2,033 Selling General and Adminsitrative Expenses Research and Development Expense Operating Income (EBIT) 415 1, , , , Interest Expense (4) (39) (17) (9) (2) (3.0) (1.9) (1.7) (8.6) (6.6) (3.4) - - Interest and Investment Income EBT (before unusual gains/losses) 443 1, , , , Restructuring Charges - - (112) Impairment of Goodwill Gain (Loss) On Sale Of Invest. - (13) (10) Gain (Loss) On Sale Of Assets In Process R & D Exp. - (49) (14) Insurance Settlements Legal Settlements (27) Total Unusual Gains/Losses - (62) (112) (27) EBT (after unusual gains/losses) , , , Income Tax Expense (121) Net-Income $ 564 $ 867 $ 470 $ 1,382 $ 197 $ 225 $ 86 $ 110 $ 618 $ 1,193 $ 781 $ 1,355 $ 834 EBITDA 625 1,468 1,100 2, ,361 2,068 1,727 2,475 2,029 Earnings Per Share Basic EPS $ 2.58 $ 3.92 $ 2.12 $ 6.06 $ 0.86 $ 0.98 $ 0.38 $ 0.48 $ 2.70 $ 5.20 $ 3.41 $ 5.91 $ 3.64 Diluted EPS $ 2.50 $ 3.84 $ 2.08 $ 5.93 $ 0.84 $ 0.96 $ 0.37 $ 0.47 $ 2.67 $ 5.15 $ 3.37 $ 5.85 $ 3.60 Basic Shares Outstanding Diluted Shares Outstanding Margins Gross Margin 16% 22% 18% 24% 18% 19% 14% 15% 17% 22% 18% 22% 18% EBITDA 11% 18% 15% 21% 15% 16% 10% 11% 14% 19% 16% 21% 17% EBIT 8% 13% 8% 16% 9% 10% 4% 5% 7% 12% 8% 13% 8% EBT (excl. Unusual Items) 8% 13% 8% 16% 9% 10% 4% 5% 7% 12% 8% 13% 8% Net-Income 10% 11% 6% 14% 8% 9% 3% 4% 6% 11% 7% 12% 7% Percentage Analysis COGS 83.54% 78.46% 82.06% 75.62% 81.76% 80.81% 87% 86% 83% 78% 83% 78% 83% SG&A 3.27% 2.72% 2.78% 2.42% 2.46% 2.67% 2.75% 2.75% 2.64% 2.75% 2.75% 2.75% 2.75% R&D 5.60% 5.75% 6.83% 6.20% 6.97% 6.83% 7.00% 7.00% 6.89% 7.00% 7.00% 7.00% 7.00% Interest Expense Total Debt Interest Rate 18.18% 7.66% 3.53% 2.25% 0.53% 0.53% 0.53% 0.53% 2.15% 2.25% 2.25% 2.25% 2.25% Interest Income from Cash Balance Cash Balance at Beginning of Period NA ,858 3,110 3,253 2,734 3,294 4,294 5,137 6,648 Interest on Cash 0.07% 0.07% 0.07% 0.24% 0.24% 0.24% 0.24% 0.24% Interest Income After Tax Interest Income Tax Expense Tax Rate % 11.62% 6.19% 9.08% 6.64% 5.86% 9.00% 9.00% 7.12% 9.00% 9.00% 9.00% 9.00% Stock Based Compensation Expense Stock Based Compensation % Sales 0.88% 0.46% 0.63% 0.61% 0.79% 0.73% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%

18 Western Digital Corp. Projections Valuation as of 01/31/2011 Balance Sheet (all figures in millions USD) FY-2007 FY-2008 FY-2009 FY-2010 Q Q Q3-2011E Q4-2011E FY-2011E FY-2012E FY-2013E FY-2014E FY-2015E Assets Cash And Equivalents 700 1,104 1,794 2,734 2,858 3,110 3,253 3,294 3,294 4,294 5,137 6,648 7,908 Short Term Investments Accounts Receivable 697 1, ,256 1,325 1,250 1,191 1,272 1,272 1,347 1,384 1,472 1,464 Inventory Deferred Tax Assets, Curr Other Current Assets Total Current Assets 2,029 2,731 3,230 4,720 4,961 5,120 5,187 5,350 5,350 6,404 7,334 8,932 10,220 Gross Property, Plant & Equipment 1,517 2,814 3,175 4,223 4,423 4,673 4,792 4,981 4,981 5,783 6,607 7,482 8,354 Accumulated Depreciation (776) (1,146) (1,591) (2,064) (2,178) (2,396) (2,480) (2,631) (2,631) (3,374) (4,237) (5,222) 6,339 Net Property, Plant & Equipment 741 1,668 1,584 2,159 2,245 2,277 2,312 2,350 2,350 2,409 2,370 2,260 2,015 Long-term Investments Goodwill Other Intangibles Deferred Tax Assets, LT Other Long-Term Assets 39 8 (9) (34) Total Assets 2,901 4,875 5,291 7,328 7,655 7,843 7,940 8,137 8,137 9,234 10,112 11,588 12,619 Liabilities Accounts Payable 882 1,181 1,101 1,507 1,703 1,628 1,652 1,750 1,750 1,690 1,837 1,837 1,943 Accrued Exp Curr. Port. of LT Debt Curr. Port. of Cap. Leases Accrued Warranty Total Current Liabilities 1,130 1,564 1,525 2,023 2,174 2,144 2,172 2,284 2,284 2,252 2,260 2,287 2,390 Long-Term Debt Other Non-Current Liabilities Total Liabilities 1,185 2,179 2,099 2,619 2,744 2,684 2,676 2,744 2,744 2,568 2,583 2,616 2,726 Common Stock Additional Paid In Capital ,022 1,038 1,040 1,059 1,078 1,078 1,158 1,240 1,328 1,415 Retained Earnings 955 1,822 2,292 3,674 3,871 4,096 4,182 4,292 4,292 5,485 6,266 7,621 8,455 Treasury Stock (51) (22) - - (39) Comprehensive Inc. and Other (1) (12) Total Common Equity 1,716 2,696 3,192 4,709 4,911 5,159 5,264 5,393 5,393 6,666 7,529 8,972 9,893 Total Equity 1,716 2,696 3,192 4,709 4,911 5,159 5,264 5,393 5,393 6,666 7,529 8,972 9,893 Total Liabilities And Equity 2,901 4,875 5,291 7,328 7,655 7,843 7,940 8,137 8,137 9,234 10,113 11,589 12,620

19 Western Digital Corp. Projections Valuation as of 01/31/2011 Balance Sheet (all figures in millions USD) FY-2007 FY-2008 FY-2009 FY-2010 Q Q Q3-2011E Q4-2011E FY-2011E FY-2012E FY-2013E FY-2014E FY-2015E Debt Beginning Current LT Debt Plus: New Current Portion Less: Cash Repayment (25) (25) (27) (29) (106) (144) (150) - - New Current Debt Total Debt (Current + Noncurrent) Balance Sheet Drivers Accounts Receivable - Days Sales Inventory - Days COGS Other Current Assets - Growth Rate -22% -30% 68% 143% -11% 0% 0% 0% 0% 0% 0% 0% Days Payable Outstanding - COGS Accrued Expenses - % Sales 4.32% 4.03% 3.31% 2.85% 2.37% 2.65% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% Accrued Warranty - % Sales 0.00% 0.38% 1.27% 1.31% 1.37% 1.36% 1.36% 1.36% 1.38% 1.35% 1.35% 1.35% 1.35% Other Non-Current Liabilities - Growth Rate 196% 31% 74% 2% 0% 0.25% 0.25% 2.83% 2% 2% 2% 2% Property Plant and Equipment Period Starting Gross PPE 1,143 1,517 2,814 3,175 4,223 4,423 4,606 4,792 4,223 4,981 5,783 6,607 7,482 Plus Capital Expenditures Plus Cash Acquisitions Plus Capital Lease Conversions PPE Adjustments (67) (67) Ending Gross PPE 1,517 2,814 3,175 4,223 4,423 4,606 4,792 4,981 4,981 5,783 6,607 7,482 8,354 Period Beginning Accumulated Depreciation 1,591 2,064 2,178 2,329 2,480 2,064 2,631 3,374 4,237 5,222 Plus Depreciation Expense ,116 Ending Accumulated Depreciation 2,064 2,178 2,329 2,480 2,631 2,631 3,374 4,237 5,222 6,339 Net-PPE 741 1,668 1,584 2,159 2,245 2,277 2,312 2,350 2,350 2,409 2,370 2,260 2,015 CAPEX % of Revenue 5.93% 7.62% 6.96% 7.48% 8.35% 10.10% 7.50% 7.50% 8.25% 7.50% 7.50% 7.50% 7.50% Average PPE Life Amortization of Intangibles Future Estimated Expense

20 Western Digital Corp. Projections Valuation as of 01/31/2011 Cash Flow Statement (All Figures in Millions USD) FY-2007 FY-2008 FY-2009 FY-2010 Q Q Q3-2011E Q4-2011E FY-2011E FY-2012E FY-2013E FY-2014E FY-2015E Net Income , , , Depreciation & Amort , Amort. of Goodwill and Intangibles Depreciation & Amort., Total , (Gain) Loss On Sale Of Invest Asset Writedown & Restructuring Costs Stock-Based Compensation Other Operating Activities (126.00) (2.00) Change in Acc. Receivable (218.00) (194.00) (330.00) (68.00) (81.69) (15.23) (74.76) (37.46) (87.26) 7.68 Change In Inventories (53.00) (148.00) (1.00) (7.00) (40.34) (31.17) (49.74) 0.07 (35.75) Change in Acc. Payable (33.00) (68.00) (59.69) (0.20) Change in Other Net Operating Assets (3.00) (69.00) (5.78) Cash from Ops , , , , , , , , Capital Expenditure (324.00) (615.00) (519.00) (737.00) (200.00) (250.00) (185.63) (189.48) (825.11) (801.60) (823.90) (875.82) (871.25) Sale of Property, Plant, and Equipment Cash Acquisitions - (927.00) (63.00) (253.00) Divestitures Invest. in Marketable & Equity Securt. (59.00) Net (Inc.) Dec. in Loans Originated/Sold Other Investing Activities Cash from Investing (383.00) (1,321.00) (551.00) (986.00) (200.00) (250.00) (185.63) (189.48) (825.11) (801.60) (823.90) (875.82) (871.25) Short Term Debt Issued Long-Term Debt Issued - 1, Total Debt Issued - 1, Short Term Debt Repaid Long-Term Debt Repaid (43.00) (1,273.00) (27.00) (82.00) (25.00) (25.00) (27.00) (29.00) (106.00) (144.00) (150.00) Total Debt Repaid (43.00) (1,273.00) (27.00) (82.00) (25.00) (25.00) (27.00) (29.00) (106.00) (144.00) (150.00) Issuance of Common Stock Repurchase of Common Stock (73.00) (60.00) (36.00) - (50.00) (50.00) Total Dividends Paid Special Dividend Paid Other Financing Activities (9.00) (29.00) (13.00) Cash from Financing (86.00) (64.00) (16.00) (66.00) (3.00) (27.00) (29.00) (125.00) (144.00) (150.00) Net Change in Cash , , Beginning Cash , , , , , , , , , , , Net-Change in Cash , , Ending Cash , , , , , , , , , , , ,907.57