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Hi Anurag,

There were a couple of key points in my thesis on this one.

1) The cloud lives on storage media and Western Digital sells it.

2) The need for storage is expected to grow fairly rapidly over the years, especially as we generate more and more data and want to store more and more of it.

3) Western Digital is one member of what is essentially a duopoly in storage.

Those items are still true, but they've turned out not to be enough, or rather they've quite possibly turned out to be irrelevant.

http://investor.wdc.com/common/download/download.cfm?company...

That's a link to the data sheet Western Digital released for Q4 2015 when it reported at the end of July. The following comes from that and my trusty calculator. (Note, I eyeballed some of this stuff, so I might be wrong on a point or two -- this post is not fact checked.)

Revenue has declined steadily for 3 quarters in a row (both sequentially and YoY). Gross profit, R&D, and net profit are also all down 3 quarters in a row sequentially.

That's on the surface and the upper most section of that file.

What's disappointing in terms of the thesis is the number of units being delivered. Notebooks and Desktops are down 34% and 29%, respectively, from the Q1 2015 highs and notebooks have seen 3 quarters in a row of YoY declines and 5 of the past 8 quarters have declined YoY. Enterprise units are down 11% from the Q2 2015 high and, after having grown steadily YoY for many quarters, YoY growth has hit a wall and actually has actually fallen 3 of the last 6 quarters. Enterprise is the cloud part of the thesis and seeing that slow way down is not good.

Then there's this point that a colleague kind of forcefully reminded me of. Price takers do not have moats. Tech is a price taker business in that the companies manufacturing the tech cannot raise their prices (HDDs here, but also chips among other things). The prices are essentially set by the customer. Apple is great at lowering its costs, but that's at the detriment of the chips and memory storage companies. Another MUE port position saw this in a brutal way -- Nam Tai Electronics, which made boards -- so much so that it's no longer even in the same business.

For some reason, I seem to be attracted to these. PowerOne was another price taker that I barely eked out a profit on when ABB bought them out. Nam Tai I mentioned, and Western Digital, too.

Where I won on Western Digital in the MUE port, however, is because I generally bought when it was in trouble, particularly after the flooding it experienced at its manufacturing sites, so I got a good price.

I think I've finally learned this lesson, though it took some real pounding to drive it into my head. I sold Western Digital from one of my accounts and I'm writing covered calls in the other account that, when they hit, will get rid of it there. Though looking at the recent price action, I should have just sold rather than getting cute with an option. Ah well.

I've also tried to rid myself of other price takers from my personal account, such as Canadian Solar, Enphase Energy, SolarEdge Technologies, and Freeport-McMoRan (at a big, big loss). Even Mobileye.

Now one of the questions I'm regularly asking is, "Is this company a price setter or a price taker?" Netflix, Coke, Pepsi, and Sherwin-Williams are price setters and I own them all. They can raise their prices and sell more. Trinity Industries, I think, is another. Possibly Textron (a MUE position I also own). If the answer to my question is "setter," I wouldn't mind owning them. I'm through investing in price takers.

I hope.

Cheers,
Jim
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