Pure Storage: In The Flat Field

If you’re not learning, then you’re stagnant. If you’re stagnant, then you’re not evolving and the business isn’t progressing. – Seth Rollins

Pure Storage (NYSE:PSTG) is an AI-powered enterprise data storage provider that helps complex businesses increase their productivity by serving data workloads in-house, on the cloud, or in hybrid environments. Its solutions include storing, testing, analyzing, securing, backing up, and recovering mission-critical data.

PSTG is considered a long-term growth story by many analysts and here is my take on it.

The High-Performance Computing Market

Increasing data volume, lack of security and analytics capabilities on local servers, decreasing implementation costs, and increasing demand for high-performance computing are likely to power the high-performance computing market in the future.

The company derives majority of its revenues from its all-flash array products (p.48), the market for which is estimated to grow at a healthy CAGR of 26.3%.

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Image Source: Research & Markets

The BFSI (Banking, Financial Services, & Insurance) sector is expected to lead the demand as it seeks to optimize operations by using AI-powered, secure back-office processes that can crunch data and quickly equip customers with error-free solutions.

The estimates above do not take into account cloud gaming, which has the potential to become as viral as social media. PSTG offers effective cloud gaming solutions and is ready for the boom if or when it happens.

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Image Source: My Twitter feed based on an update in The Lead-Lag Report

The global cloud gaming market is estimated to grow from $585 million in 2020 to a humongous $4.8 billion by 2023 at a phenomenal CAGR of 186.45%.

Despite the bullish estimates above, PSTG has disclosed in its SEC filing that offerings from public cloud providers are increasing (p.40) by the day and that the industry has become very competitive.

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Image Source: SEC Filing

The company has disclosed that the external storage market has not witnessed substantial growth, mainly because of competition and a changing business environment. In other words, expectations have yet to convert to numbers and the competition is growing.

Accumulated Deficit

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Image Source: Balance Sheet

PSTG has not made profits since its inception (p.46). It incurred a net loss of $201 million in 2020 and $156 million in the first two quarters of the financial year 2021 ended August 2020. As of August 2020, the company’s common equity of $2.17 billion was eroded to $745 million because of its accumulated deficit of $1.4 billion.

PSTG has disclosed that a high percentage of its operating expenses are fixed. So, if the market remains flat, PSTG’s revenues and expenses are likely to stagnate, and if the competition increases, its revenues may fall and net losses may increase. The company says it will keep investing heavily in SG&A and R&D expenses, and therefore it is likely that it will report losses in the near term (p.46).

The China Angle

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Image Source: SEC Filing

PSTG sources some components from China, and if there is any trade friction that results in tariff wars, the company’s profitability can be adversely impacted.

All of us are unsure about what can happen, but we know that something bad can. So, I figured that mentioning the China angle was the right thing to do.

Growth

PSTG is a growth stock and therefore is expected to report growing revenues. In fact, COVID-19 has benefitted the storage industry and therefore PSTG should have done better than analysts expected.

However, its revenues and expenses have been in flat territory since July 2019. In Q2 2021 (ended August 2020), the company generated revenues of $403.7 million as compared to $396.4 million in Q2 2020 (ended July 2019).

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Image Source: Income Statement

Expenses too have been in flat terrain in the last five quarters. In Q2 2021, PSTG generated $50.7 million in operating cash flows as compared to $48.8 million in Q2 2020 – so even the operating cash flow generation is flat.

A Forward Price/Book ratio of 6.63 compared to the sector median of 4.09 and a Forward Price/Cash Flow ratio of 30.54 compared to the sector median of 19.49 suggest that the stock is richly valued.

Summing up

PSTG has to face many stumbling blocks going forward, such as heavy competition, stagnant demand, high valuations, and a potential U.S.-China tariff war. Besides, the company has to keep investing heavily in SG&A and R&D expenses to increase its sales. The company also has disclosed it will report losses in the near term. So, despite a bullish demand outlook, I would stay away from PSTG as a medium- to long-term investment until it starts reporting substantial increases in revenues and profits.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.