Pure Storage: Attractive In A World Heavily Loaded With Data (NYSE:PSTG)

Everything we use today generates data. We generate and consume so rapidly that scientists fear a data storage crisis by 2025. Pure Storage, Inc. (NYSE:PSTG) is the product leader for primary storage through its next-gen technologies, and businesses across the globe are quickly catching on to its value. With over 11,000 customers, of which 58% are Fortune 500, including Meta (META), PSTG is winning over customers from larger, more established companies by providing solutions that store more, for less energy and take up less space, with portability offerings. It has rewarded investors with returns of 52.39% over the last five years.

PSTG has upward solid top and bottom-line results, a healthy balance sheet, growing cash flow, investing in disruptive advancing technologies and benefits from its subscription-based model, which is now at over $1 billion in annual recurring revenue. The next-generation data storage market is predicted to grow by 8.5% to $81 billion by 2025. With this type of upside, potential investors may want to take a bullish stance on this stock.

Overview

PSTG was founded in 2009 and IPO’d in October 2015, raising $425 million at $17 per share. It delivers advanced data storage solutions for B2B enterprises looking to assist them with all their data storage and memory needs. Memory can be stored on magnetic disks, legacy storage solutions, or flash. In short, PSTG has flash offerings which can replace magnetic disks. It can make a strong business case to potential customers because solutions take up less space, require less cooling energy, and their applications can run anywhere through portable technology. The portfolio offers customers flexibility and pay-per-usage options. Below is an overview of its product portfolio.

The business generates revenue through its products and subscription services segments. Its annual recurring revenue passed $1 billion last quarter. Below is an overview of the company, and it’s quickly taking up enterprise storage space. The business has several well-established customers, such as Facebook, and a partnership with Amazon (AMZN).

Competitive landscape

The storage space industry is fiercely competitive with large companies such as Dell, IBM, HP Enterprise EMC, Hitachi Vantara and NetApp, with various solutions, most of which are legacy hard disk storage solutions. PSTG, as a newer face, has been able to increase market share by providing solid solutions that are financially interesting to customers. For the second consecutive year, PSTG has been given the top leadership position in the Gartner Quadrant for primary storage solutions regarding its offering and ability to execute.

Although the industry is competitive, it is also expected to increase immensely. By 2025 the next-gen data storage market is expected to hit $81 billion due to increased data across business sectors, increased usage of IoT and further technological advancements.

Financials

PSTG is going through a significant growth phase. In a relatively short time, the company has become profitable while still spending a great deal on operational expenses such as R&D. An attractive company to invest in is consistently growing. If we look at the revenue, we can see a nice upward trending curve. The gross profit margins have also improved from 64.48% in FY18 to 68.34% TTM. This could be attributed to a growing number of ARR from its as-a-service subscriptions, which are less costly.

FY22 PSTG was still a loss-making entity at a net income of negative $143.3 million, although we know the company has since become profitable if we look at the TTM, which is at $13.5 million and its positive quarterly results.

Although the company is making much revenue, we can see that much of this is going into operating expenses, which is to be expected for a high-tech company that is in a significant growth phase, as seen in the table below. However, again we see this decreasing with $48.7 million TTM.

Another critical aspect to look at the company’s cash flow which can be reinvested in the company, used to pay expenses and returned to investors. The company had a positive cash flow of $279.5 million for FY22, and the TTM cash flow is at $427.8 million. It has consistently grown its cash for the last eight years, which is very positive.

If we look at the capital structure below, we can see that the company has $1.47 billion in cash and a total debt of $752.08 million. We can see that the company has enough liquid assets to meet its short-term obligations, with a current ratio of 1.36 and a quick ratio of 1.17.

I have compared PSTG to some of its storage peers in the market and used the Seeking Alpha Quant Factor Grades system for a relative comparison. PSTG has the highest price-to-earnings ratio at 21.31, which could indicate that the stock is overvalued. However, it is growing much faster than its peers, making it difficult to compare. If we consider growth and look at the FWD PEG, PSTG becomes a much more exciting stock at a ratio of 0.99, only DELL is lower at 0.73.

Risks

PRTG provides a business-critical solution to its customers, some of whom are vast and world-renowned enterprises. If there are any disruptions due to technical failures or data breaches due to security weaknesses, this could have a severe impact on the reputation and future growth of the business. There are a lot of macroeconomic factors that can impact the running of the industry, such as country laws and regulations concerning data storage. Data storage is a rapidly developing market space, making it difficult to predict future changes or potential new competitors and technologies. This is a ‘disrupt and be disrupted’ environment which requires constant advancements to stay ahead. The company is onboarding many customers. Supply chain disruptions could affect the business’s financial operations if there are delays due to a lack of sufficient components.

Final thoughts

PRTG is delivering financially attractive solutions that offer real operational benefits to its customers by reducing the costs involved with data storage. PRTG is in a clear growth phase, with upward trending top and bottom-line performance, a healthy balance sheet, and positive cash flow to reinvest in advancing its technologies. It has increased its ARR to over $1 billion through its subscription business segment. With a growing customer base in a market with substantial long-term growth potential, this is an exciting stock to look into as a potential investment. Investors may want to take a bullish stance on this company.