Is pure storage stock a purchase?


Pure storage‘s (NYSE: PSTG) The share price climbed 13% to an all-time high on November 24 after the data storage company released its third quarter results.

Its revenue grew 37% year-over-year to $ 562.7 million, beating estimates of $ 32.1 million. Its adjusted net income fell from $ 1.8 million a year ago to $ 66.7 million, or $ 0.22 per share, which also exceeded expectations by a dime.

For the full year, Pure Storage expects its revenue to grow 25% to $ 2.1 billion. This far exceeded analysts’ expectations for 21% growth and would mark a major acceleration from its 2% growth in fiscal 2021.

Image source: Getty Images.

Pure Storage’s growth rates are impressive, but is it too late to buy the stock? Let’s take a new look at its business and valuations to find out.

What does Pure Storage do?

Pure Storage sells flash data storage hardware and software solutions for data centers. Flash memory (NAND) chips are more expensive than traditional flatbed hard drives (HDDs), but they are smaller, faster, more energy efficient, and less prone to damage.

Pure Storage initially built its storage devices with third-party SSDs. But it eventually replaced those SSDs with its own proprietary hardware and launched built-in deduplication, compression, and artificial intelligence software to help businesses save storage space and properly configure their devices. It generated 65% of its revenue from these hardware and software products in the first nine months of fiscal 2022.

It also provides its own storage-as-a-service solutions, which combine on-premises data storage solutions with public cloud services for hybrid cloud customers. These subscription plans generated the remaining 35% of its revenue in the first nine months of the year.

Pure Storage controlled 13% of the all-flash array market in early 2021, according to Gartner. This puts him in third place behind Dell (NYSE: DELL), which controls 33% of the market through EMC, and NetApp (NASDAQ: NTAP), which holds a 20% stake.

How fast is Pure Storage growing?

In fiscal 2021, Pure Storage’s growth slowed as large companies cut spending on data storage upgrades throughout the pandemic. However, its subscription business remained resilient and continued to grow throughout fiscal 2022 as its product segment gradually recovered:

Income Growth (YOY)

Fiscal year 2021

Q1 2022

Q2 2022

Q3 2022

Product

(8%)

1%

19%

37%

Subscription Services

33%

35%

31%

38%

Total

2%

12%

23%

37%

Source: Pure storage. YOY = Year after year.

Pure Storage also acquired Portworx, a cloud-native data storage and management platform, for $ 370 million last September, and integrated it into its subscription services ecosystem.

CFO Kevan Krysler initially said Portwork’s short-term contribution to Pure Storage’s revenue would be “quite small”. But on the second quarter conference call in August, CEO Charles Giancarlo said Portwork’s revenue had already “tripled year over year” without disclosing exact numbers.

Next year, analysts expect Pure Storage’s revenue to increase by around 16% as post-pandemic comparisons normalize. The stock is trading less than four times expected, so its price-to-sell ratio still looks surprisingly reasonable.

How profitable is Pure Storage?

Pure Storage is still not yet profitable on a generally accepted accounting principles (GAAP) basis, mainly due to high stock-based compensation expenses, which consumed 14% of its revenue in the first nine months of Fiscal 2022. reduced its GAAP year-over-year net loss – from $ 229.8 million to $ 158.2 million – during that period.

Meanwhile, Pure Storage’s non-GAAP gross margins have held steady at around 70% this year as its non-GAAP operating margins have improved significantly:

Period

Fiscal year 2021

Q1 2022

Q2 2022

Q3 2022

Gross margin

70%

70.5%

70.5%

68.5%

Operating margin

2.7%

0.1%

9.4%

12.3%

Source: Pure storage. Not in accordance with GAAP.

Pure Storage’s gross margin was reduced by higher supply chain costs for its product segment in the third quarter. However, the gross margin of its subscription business remained stable as lower travel and physical marketing costs boosted its operating margins.

It expects its operating margin to increase to 14% in the fourth quarter and 10% for the full year. Analysts expect its adjusted earnings to rise 175% this year and 26% next year.

Pure Storage’s stock may initially seem a bit expensive at over 50 times the profits eventually, but its growth rates arguably justify the higher multiple.

So is Pure Storage’s stock worth buying?

Pure Storage’s growth rates and valuations are attractive, but investors should recognize its weaknesses. It still faces intense competition in the all-flash array market from more diverse competitors, and NAND prices are cyclical. If NAND prices unexpectedly rise again, its gross margins will drop and its data center customers may fall back to cheaper hard drive-based solutions.

That said, I think Pure Storage is still a solid long-term investment in the centuries-old move away from hard drive-based storage solutions. Therefore, it is not yet too late to buy the stock, even after its rally of almost 40% since the start of the year.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

About Aldrich Stanley

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