Western Digital Corp. (NASDAQ: WDC) hit a new 52-week low in Friday’s trading session following a downgrade from a key analyst. Merrill Lynch’s Wamsi Mohan downgraded the stock to an Underperform rating while lowering the price target to $30 from $61, after having maintained a Buy rating for some time.

The brokerage firm downgraded Western Digital for a few reasons. First, pro-forma estimates have significant risk with calendar year 2017 earnings per share (EPS) estimates taking a 36% cut. However, the firm gives management credit for strong execution, noting that the competitive dynamics are different in NAND versus HDD. SanDisk margins likely have peaked in the near term with several headwinds in 2017. Also the HDD market is eroding faster with high margin performance enterprise at higher risk, and Western Digital has significantly higher debt and share count that create EPS headwinds.

Merrill Lynch outlined multiple downside risks in its report as well:

We could see further risk to numbers if (1) average selling price (ASP) for NAND Flash declines faster on competitive pricing, (2) the Japanese Yen gets stronger vs USD (i.e. higher NAND manufacturing cost), (3) our royalty renegotiation assumptions are not conservative enough (22% decline Y/Y), or (4) HDD demand continues to deteriorate. We note that the model is highly sensitive and a 10% Yen increase (from a base of 121) could lower C2017 EPS by $0.49, while a 10% lower NAND pricing estimate (from $0.16/GB to $0.14/GB) may lower EPS by $1.52 (or from $3.88 to $2.36).

Conversely, the firm could see upside to its model from the incremental debt pay down, with every $1.0 billion in debt reduction adding an incremental $0.20 in annual EPS. Merrill Lynch also can see upside from a pickup in enterprise HDDs (hyperscale demand), with every 1 million capacity enterprise HDD units adding $145 million to revenue and $0.16 to EPS. Any stabilization in the HDD TAM or stemming in the PC declines could be further upside. The firm models 2017 as the near-term trough, assuming 3D NAND flash yield/gross margin improvement and deleveraging will help 2018 EPS.

The brokerage firm gave its investment rationale as follows:

(1) the PC HDD market has deteriorated, (2) NAND Flash margins have peaked for now with transition to next gen 3D NAND, and (3) significantly higher debt and sharecount from M&A. We believe consensus estimates are too high and rate WDC Underperform as it transitions NAND technology. Longer-term we see the benefit from acquiring SanDisk NAND Flash, especially as the notebook and high-performance enterprise HDD market transitions away from HDDs.

Shares of Western Digital were trading down 1.4% at $35.80 midday Friday, with a consensus analyst price target of $61.75 and a 52-week trading range of $34.99 to $99.76.

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