Western Digital Emerges as a New AI Storage Winner Alongside Micron

Recent AI markets have been driven mainly by the shortage of GPUs and the remarkable expansion of Micron's sales of high-bandwidth memory however there is a secondary, and much less discussed, constraint derived from the creation of persistent data storage brought about by the buildout of AI surrounding the training, inference, agentic AI, and enterprise-scale applications that generate a tremendous amount of data that needs to be archived and retrieved at a reasonable cost. As a result, there is continuing growth in the demand for NAND flash and high-capacity hard drive (HDD).

After the separation of its flash business into Sandisk in 2025, Western Digital is an independent supplier solely to the HDD segment who has its product offering is primarily directed towards cloud and enterprise customers. Its position continues to be bolstered because the hyperscalers have made large-scale storage deployments associated with AI infrastructure a significant priority.

As indicated by management, nearly all of Western Digital's 2026 HDD capacity is already under contract and has long-term agreements with customers extending into 2028 and 2029.

Based on the last report of the quarterly earnings from Western Digital it is clear the company has begun experiencing major positive changes to its earnings because of the AI storage cycle continuing to pick up steam.

During the third fiscal quarter ending March 2026 (the third quarter of FY26) the company reported revenue of $3.34 billion, up 45% from the year prior. Also noteworthy for quarterly results, Adjusted Gross Margin exceeded 50% for the first time in company history (50.5%); it was 40% last year. Adjusted EPS increased nearly doubled to $2.72.

Pricing has played a substantial role in these improvements. The Average Selling Price (“ASP”) per Exabyte increased 9% over the previous year while the number of Exabytes sold (Exabytes shipped) increased 34%. This large increase demonstrates strong enterprise related demand for high-capacity storage systems.

The company has also significantly increased its deployment of UltraSMR technology, which allows dramatically greater densities of storage. Management stated that two of its largest customers are utilizing UltraSMR technology to satisfy nearly all of their exabyte based storage requirements.

Additionally, cash generation significantly improved; the company generated nearly $1.0 billion in free cash flow in the quarter leading to substantial ongoing aggressive shareholder returns and continued improvements of its balance sheet. The company increased its quarterly dividend by 20% after having increased dividends 25% within the previous six months.

In addition to being squeezed out of an opportunity for price increases from the DRAM and high-bandwidth memory supply imbalance that has driven prices up for Micron, the demand from AI also has begun entering other adjacent sectors.

The latest evidence of this is Micron's strong volume of sales for advanced DRAM and high-bandwidth memory. These two technologies are crucial for the operation of AI acceleration and inference workloads. Therefore, due to the volume of sales and the corresponding increase in prices during this period of supply constraints, it should not be surprising that Micron has stated previously that their entire supply of advanced memory for 2026 has been completely sold out.

Similarly, the same demand pressure that is driving the sales of DRAM is also currently impacting the markets for NAND flash and HDDs.

Western Digital's NAND flash business had recently been acquired by Sandisk (formerly marred by corporate divestiture). The company's recent quarterly revenue growth is >200%, with gross margin of >78%. These results are reflective of the sharp increase in ASPs across the flash storage markets.

Unlike previous memory cycles, most storage providers are creating long-term multi-year supply contracts with hyperscale customers in order to reduce fluctuation of earnings, such as providing a commitment of volumes and establishing a framework for pricing to reduce cash flow volatility.

The overall premise of this situation is as follows: there exists a significant need for large amounts of computing power to accommodate existing and future AI systems. At the same time, AI systems require a corresponding need for large amounts of persistent and cost-effective storage infrastructure. As a result, we believe the demand cycle for storage infrastructure will likely be much longer in duration than that of any previous boom in the investment and development of cloud infrastructure.

High risk remains for Western Digital and other AI storage stocks even with improving fundamentals. 

Western Digital's growth relies on a small number of hyperscale cloud customers for much of their revenue. If hyperscale cloud spending on AI infrastructure slows, changes occur in procurement behavior or enterprise capital equipment spending is reduced, this will put significant downward pressure onto pricing of products and their associated margins.

Execution risk continues to be another major issue facing Western Digital. They continue to work through the commercialisation stages of next generation HAMR drives and their management has stated that yield optimisation and reliability refinement are continuing ahead of an anticipated ramp in production which is not expected to occur until at least 2027.

Valuation also continues to be a major concern. Over the past 12 months, Western Digital's share price is up over 200% as investors have received the AI storage story with enthusiasm and similarly with Micron and Sandisk, there are increasing concerns about whether the market may already be pricing in years of accelerating demand for AI infrastructure.

There appears to be increasing numbers of both optimistic and pessimistic discussions among online investors surrounding the longevity of the AI infrastructure cycle which has a history of large boom and bust price fluctuations.

The emerging AI storage trade now encompasses various other storage infrastructure companies like Western Digital and Sandisk, in addition to companies that solely produce memory semiconductors (e.g., Micron).

The major consideration that investors are looking at is if the current market situation represents only a temporary supply squeeze or if we are actually at the beginning of a much larger supply cycle pertaining to Artificial Intelligence requiring the use of memory-based storage for inference processing in the enterprise, data retention for extended periods of time, and deploying enterprise-grade A.I. systems.

If buyer interest from hyperscalers continues to remain robust while the number of deployed A.I. workloads increases (beyond just training) — then it could change the outlook for how long demand for new memory-based storage will sustain. This would also further encourage Western Digital's pivot to focus on higher-margin enterprise HDDs — potentially making this transition last longer than all other cycles have historically.

On the other hand, if spending on A.I. continues to slow or storage pricing normalizes much faster than anticipated — that would mean the normal cyclicality of the sector would return and possibly return very quickly given how volatile the earnings of the sector have historically been. Therefore, given the current environment, Western Digital is an interesting investment in the A.I. infrastructure space which may provide some long-term opportunity for growth; but this also comes with substantial cyclical risks and execution risk.