What could be simpler than a storage business? No not self-storage containers on the edge of town, but storage of data for companies. IPOed at $17 two years ago, Pure Storage is still under water. Should we tread carefully?
Key Stats
| Ticker | PSTG |
|---|---|
| Sector | Storage Devices |
| Latest price | $15.99 |
| Value | $3,382M |
| Daily vol | $32M |
| Date | 02 October 2017 |
| Financials | SEC Filings |
| Website | purestorage.com |
1. What's so great about Flash?
Pure Storage is focused on delivering software-defined all-flash solutions that are fast and cloud-capable for customers, enabling customers to put data to work for their businesses.
Now that sounds a bit complicated, doesn't it. And why is flash memory so much better than hard disks? Here's their pitch from their IPO:
Our business model builds on our technology innovations to reverse the traditional storage business model. Instead of moving data between old and new systems via forklift upgrades, we keep business data and applications in place and upgrade technology around it. Our platform and business model are designed to add value to customers for a decade or more, reducing total cost of storage ownership while increasing loyalty.
Sorry, but that is still gobbledygook to me. And it didn't get any easier, the more I read.
Still they must be doing something right, as they've over 3,700 customers including 25% of the Fortune 500. Though watch out, they note that it's a "high touch" sales model. I expect it has to be if you are selling million dollar critical storage infrastructure to big corporates!
2. How's it working out?
The growth until the January 2016 was remarkable, with sales accelerating. But the year to Jan 2017, and the forecasts for this year, show a market slowdown. Now, adding $300m a year is brilliant, don't misunderstand me, it's just that it's not stellar! And it's not long before Wall Street things they'll turn a profit.
| January | 2013A | 2014A | 2015A | 2016A | 2017A | 2018E | 2019E |
|---|---|---|---|---|---|---|---|
| Revenue | $6m | $43m | $174m | $440m | $728m | $1,010m | $1,317m |
| EPS | N/A | N/A | $-6.56 | $-2.59 | $-1.26 | $-0.21 | $+0.04 |
On top of that with $523M of net cash, (15% of the market value) the company has some room, in case of hiccups. Separately, they don't pay a dividend, as it's growth model.
However, I am a little concerned by the long-term expectations. Here's how they see margins_FINAL.pdf) on page 15 of their July Quarter presentation.
| as % of sales | Last Quarter | Long Term |
|---|---|---|
| Gross margin | 67% | 63 to 68% |
| R&D costs | 23% | 15 to 20% |
| Sales costs | 49% | 25 to 30% |
| General costs | 8% | 5 to 7% |
| Operating margin | -12% | 15 to 20% |
They'd have to half marketing to get to a reasonable profit. Which seems an aggressive assumption. Sure, they've grown revenue faster than costs the last 3 years, but there's no evidence they can get to that target yet.
3. How do they compare?
It's hard to find a reasonable group of competitors. There are tiny companies like Quantum and Tintri. Firms like NetApp who bought into the market. Legacy firms like Seagate and Western Digital. And some big-boys like Dell, HP, IBM, and Hitachi.
| Companies | Latest Sales | Operating Profit | Return on Equity |
|---|---|---|---|
| Pure Storage Inc | $832M | -19% | -51% |
| Quantum Corp | $506M | 4% | N/A |
| Tintri Inc | $140M | -84% | N/A |
| NetApp Inc. | $5,550M | 18% | 21% |
| Western Digital Corp | $19,093M | 23% | 4% |
| Seagate Technology PLC | $10,771M | 18% | 52% |
And if you are wondering about the big-boys... when talking about the competition, they note:
The acquisitions of EMC by Dell, Nimble Storage by HP Enterprise and SolidFire by NetApp have introduced new competitive dynamics into the storage market.
Excuse me if I find that ominous.
4. Struggling with the valuation
It's never easy to hang my hat on a loss-making business. :( Especially a high grower. And in the case of $PSTG even the sales multiple is way ahead of the entire group.
| Peers | Valuation | Forecast PE | Long-term Growth | Dividend Yield | Price to Sales |
|---|---|---|---|---|---|
| PSTG.K | $3,382M | -74x | 40% | 0% | 3.4x |
| QTM | $211M | 13x | 20% | 0% | 0.6x |
| TNTR.O | $98M | -1x | N/A | 0% | 0.6x |
| NTAP.O | $11,805M | 14x | 16% | 2% | 1.6x |
| WDC.O | $25,503M | 7x | 26% | 2% | 1.7x |
| STX.O | $9,547M | 9x | 22% | 8% | 1.1x |
If I want to be generous, I do a back of the envelope, cash flow analysis. Say they grow sales by $300m every year, at a 20% margin and pay a 25% tax rate. That would yield an extra $45m of cash a year. Discount that over the next 30 years at 8%, add in the cash in the bank and I get to $23 a share. Though warning... tweak the assumptions and blow up the result.
5. Has Wall Street given up?
The loyal brokers of Wall Street that IPOed the business 2 years ago, still say Buy. Though they've cut their target from $22 a share at the IPO to $16. Gawd... that's where the stock is.
What's a little weird is that the company has beaten earnings and sales forecasts every quarter since the IPO. And that's not driven the stock up.
Though in August the company appointed a new CEO, Charles Giancarlo, which has lead to increased optimism. He was a key man at Cisco, then went on to be a venture capitalist. He's on the board of Accenture, Arista and ServiceNow. So nicely connected!
6. Flash Gordon or flash in the pan?
I hate buying stocks when I don't really understand what their edge is. Is $PSTG growing fast because it's a great solution at a reasonable price? O is the price too cheap? Meaning they can never really generate much cashflow? I just can't tell.
But what I can see, is that sales aren't accelerating. They are growing fast, but if I'm looking for a moon-shot, it has to show that sales are going to go exponential. No sign here... yet.
Perhaps the game here is M&A, that the new CEO will dress it up for sale. But I'd prefer to invest on fundamentals, not hope.
For now, I'm not storing my cash in $PSTG.
View the archive of Stock a Day posts at it's subreddit stockaday. Disclosure: I have no positions in any stocks mentioned. However I may initiate a position within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Reddit, moderators, and the author do not advise making investment decisions based on discussion in these posts. Analysis is not subject to validation and users take action at their own risk.
Submitted October 02, 2017 at 09:10AM by shane_stockflare http://ift.tt/2xasz7h
