Generally speaking long term investing is the way to go. But no-one is immune from buying too high. Zooming in on an example, the Western Digital Corporation (NASDAQ:WDC) share price dropped 66% in the last half decade. We certainly feel for shareholders who bought near the top. And some of the more recent buyers are probably worried, too, with the stock falling 20% in the last year. Unfortunately the share price momentum is still quite negative, with prices down 14% in thirty days. We do note, however, that the broader market is down 5.9% in that period, and this may have weighed on the share price.
Since Western Digital has shed US$808m from its value in the past 7 days, let's see if the longer term decline has been driven by the business' economics.
Given that Western Digital didn't make a profit in the last twelve months, we'll focus on revenue growth to form a quick view of its business development. When a company doesn't make profits, we'd generally expect to see good revenue growth. Some companies are willing to postpone profitability to grow revenue faster, but in that case one does expect good top-line growth.
In the last five years Western Digital saw its revenue shrink by 2.6% per year. That's not what investors generally want to see. With neither profit nor revenue growth, the loss of 11% per year doesn't really surprise us. The chance of imminent investor enthusiasm for this stock seems slimmer than Louise Brooks. Not that many investors like to invest in companies that are losing money and not growing revenue.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
Western Digital is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. If you are thinking of buying or selling Western Digital stock, you should check out this free report showing analyst consensus estimates for future profits.
What About The Total Shareholder Return (TSR)?
Investors should note that there's a difference between Western Digital's total shareholder return (TSR) and its share price change, which we've covered above. The TSR attempts to capture the value of dividends (as if they were reinvested) as well as any spin-offs or discounted capital raisings offered to shareholders. Its history of dividend payouts mean that Western Digital's TSR, which was a 63% drop over the last 5 years, was not as bad as the share price return.
A Different Perspective
While the broader market lost about 8.3% in the twelve months, Western Digital shareholders did even worse, losing 20%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 10% per year over five years. We realise that Baron Rothschild has said investors should "buy when there is blood on the streets", but we caution that investors should first be sure they are buying a high quality business. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For example, we've discovered 2 warning signs for Western Digital (1 is a bit unpleasant!) that you should be aware of before investing here.
If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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