$PSTG Q3 2022 Earnings Report
$PSTG Long
Pure Storage is a company that makes data storage very similar to USBs, however, on a much bigger scale. The company beat estimates in all of the last four quarters with an average earnings surprise of 200%.
As also seen from the picture above, the only two times they weren’t able to beat the EPS were back in 2019. Pure Storage is likely to benefit from the high demand in the emerging markets for artificial intelligence, machine learning, and most importantly VR as the meta world is becoming more popular day by day. Recent collaborations with Snowflake, Kyndryl, and AWS are also likely to expand its technology portfolio and add to its earnings.
Apart from that, the rapid move to remote/hybrid work setup as COVID-19 is increasing again is also likely to have had a positive impact on Pure Storage’s multi-cloud offerings and cloud data services. Continued momentum in its subscription services is likely to have boosted Pure Storage’s fiscal second quarter performance as well as mentioned by the CEO during the last quarter.
In my opinion, the company is well positioned to gain from the ongoing data explosion. The company’s growing group of products which are known for their portability, efficiency, and reliability over traditional storage systems is likely to have a very good impact on this quarter. This provides customers with higher performance capabilities and enables them to run complex cloud workloads on a single platform.
The company also continues to invest heavily in research and development to launch new products as well as enhance existing product lines. Recently, it launched the improved FlashBlade//S solution modular architecture that delivers high levels of performance and capacity optimization without the need for caching solutions. Pure Storage added 360,000 new customers, ending the quarter with a customer count of more than 10 million and that was all during the beginning of the metaverse boom which I’m expecting to be much more this quarter.
Higher expenses on product development and competition from other storage competitors might have limited margin expansion in the future however, I think that’s to be expected and they won’t be as heavily impacted as other industries. Earlier, I had talked about MongoDB along with their other competitors which are database companies. This quarter was great for the database section of the stock market and they all had amazing gains. While they might not feel related to Pure Storage at all, these stocks all need a place to be stored on. That’s where Pure storage comes in. With the heavy demand and customer count in the database segment, these companies are forced to get new storage systems for their projects, and Pure Storage being one of the main providers, many of them buy it from them. Something else backing up the high customer demand is the fact that the company raised its guidance last quarter, even in this economy.
At this point, with all the success Pure is having, the question is how it will be able to maintain its growth in an environment that might soon become a recession. This answer can be decided on two factors. One of it being continued market share gains. Market researcher IDC is projecting that the ESS market (Enterprise Storage) is growing at about 2% this year. Within that market, the segment that Pure competes in (flash storage) is forecast to grow at around 14% over the next several years. Pure has been a share gainer for several years and it would be extremely unlikely in my opinion for it to change, especially taking a look at their strong recent reports.
Pure reported the results of its first quarter at the start of June. Growth was an amazing 50% organically. Those revenues were 19% greater than projected and margins were 4X greater than the forecast. The free cash flow margin was 30%. The company raised its forecast for annual revenue growth from 20% to 23%. It raised its margin guidance by 50 bps as well. This was actually the second quarter in a row in which results were far above forecasts and expectations. To compare these numbers to Pure’s competitors, NetApp grew its product revenues by 6% and Dell’s most recent quarter showed its storage revenues up just 9%. Last quarter, Pure’s gross margin on its product revenue was 70%, which compared to 69% in the year-earlier quarter. That compares to a gross margin of 51% for NetApp on its product revenues so I’m very confident that pure will continue to dominate the market shares.
Another huge factor setting Pure apart from other competitors is the fact that they design its own hardware so they were able to fulfill orders when its competitors have been constrained. The Pure supply chain is simply much simpler to manage than the supply chains of other flash storage companies. Overall the company is far more focused on developing and selling advanced technologies than its competitors. It chose to build a business model that is based on very high development spending, which has translated into higher-than-average selling prices, gross margins, and growth. Last quarter, for example, the company’s research and development spending were $161 million or 20% of revenue. That compares to NetApp which spent 14% of revenues, or $235 million on development despite having a significantly more complex product line that includes hybrid as well as pure flash arrays. The Dell comparison is not really meaningful, because that company has to fund the development of so many products including PCs and other products within what it calls its Client Solutions group. That said, its development spending at just 2.6% of revenues is indicative of a dramatically different business strategy than that of Pure. To close the essay, I would like to add what the CEO had to say back in June. While everything might not be true now, I highly doubt that any of the things he said have drastically changed by now. “What we’re seeing is strong momentum in the market overall. All of our products, customers buying more, the fact that we have a stronger and broader portfolio now being brought into a much greater set of opportunities in large existing customers and a stronger brand that’s allowing us to penetrate net new logos and to penetrate with larger opportunities in larger companies as a net new logo. So we’re actually seeing strength. And just to address your question, I would say that our -- the way we’re looking at the macro is a little bit different. I would say we have not yet seen effects -- the macro affecting us or the customers that we speak to, but we are not blind to the fact that the macro and the possibility of the economic slowdown can affect us going forward. So I would say what we’re currently seeing -- what I’m currently seeing in the market through last quarter, continues to be strong demand by IT customers and then a greater acceptance for Pure overall, just the strengthening, if you will, of our brand and our value proposition -- and the breadth of our value proposition to our customers.” Market Cap:8,565,387,253 P/E Ratio:-210.64 Initial reaction:Long Researched reaction:Long CEO: Time:After close Estimate:+8%