Summary

• Pure Storage Inc is a potential market leader in data storage-related technologies and solutions, serving a wide range of clients of different sizes from varying industries.
• The data storage industry is highly critical and is set to become one of the most significant in the global system in the coming years.
• PSTG has earnings that not only crush analyst estimates by a hefty margin but also highlight an epic growth trajectory.
• In comparison to its peer stocks, PSTG appears to be the fastest rising and is on its way to leading the industry.

Pure Storage Inc (PSTG) is a buy for a very simple reason; the stock has earnings that are growing at a rate I believe is too good to ignore. The company is part of an industry that is set to be at the forefront of global systems and across industries. The best time to invest is now.

Company Overview

Pure Storage Inc is a mid-sized American tech company that specializes in products and services of data storage-related technologies and solutions. The company, presently holding a market capitalization of over $7 billion, is a major player in the realm of data storage, as well as its management.

Through its innovative approach, Pure Storage has rapidly enhanced its capabilities over the years and has pioneered solid-state All-Flash technology, allowing it to offer next-gen, and sustainable storage solutions. Building on this dynamic approach to data storage, Pure Storage had launched its flagship offering, Purity Software, which has allowed PSTG to maximize its solid-state storage benefits. Through this, the company claims to lead the market in terms of performance, reliability, efficiency, as well as environmental sustainability. Pure Storage offers a range of products and services that cater to every class of clients with different data storage needs. These include block-oriented storage, QLC Flash array, could block storage, as well as unstructured data storage solutions.

With the wide range of data storage solutions PSTG offers, as well as the process simplification of data consumption and interaction, the company serves a critical need across a wide range of industries. The technologies developed by the company have delivered data storage solutions in the contexts of cloud environments (both public and hybrid), big data analytics, disaster recovery, data recovery, and mission-critical production. Given these features, the company is widely celebrated as a data storage leader in the industry, as has been awarded by Gartner consecutively for the last eight years.

Market Assessment

Industries at large have been experiencing an information explosion throughout the prior decade, with little idea of how to strategically put these data streams to good use. With the introduction of 5G technologies, the Internet of Things, Cloud Computing, and Artificial Intelligence, data storage has become one of the most sophisticated yet critical markets to function.

Within the software industry, the data storage sector is one of the most dynamic and is rapidly growing, owing to the widespread digital transformation that has defined the last decade. The sector was valued at $51.77 billion in 2020 and is expected to climb to $78 billion by 2026, reflecting a CAGR of 7.1%.

As is the case with the tech sector, data storage solutions are defined by fast-paced innovation and growth, as well as industrial giants that have access to finances that could potentially fund disruptive innovations in the field. With improvements within the industry taking place at an exponential rate, users are offered enhanced simplicity and speed, allowing multiple IT components to function within a single, optimized computing package.

Data-related technologies permeate virtually every organization and thus making its efficient storage, consumption, and interaction critical. Given these realities, I believe it is highly unlikely for data to ever lose its relevance in normal circumstances. As a result, the industry’s sustainability, in many ways, could be linked to that of the global order itself and the smooth continuation of wider systems. This critical nature of the industry makes it largely resilient to broader conditions, as businesses, government services, hospitals, the military, and many more will continue to show a reliance on their data-driven systems being optimally managed. Besides Pure Storage, the market has giant players that include Dell, HPE, NetApp Inc, Nutanix, and others.

Earnings and Performance

Pure Storage had seen surging growth in its financials, after having shifted to a subscription-based business model. This phenomenal growth can be seen in the stock’s EBITDA trends over the years:

I believe a growth trend of this shape is highly significant and indicates PSTG as being a growth stock, as opposed to a value stock. What is even more impressive that how the stock is gaining a reputation to crumple earnings estimates consistently:

In its most recent earnings release, for F22Q4, the surprise above expectations triggered bulls into action, driving up PSTG price by almost 20%. Where analysts projected revenue of approximately $630 million, and an EPS figure of $0.26 per share, Pure Storage actually netted in a revenue figure of almost $710 million, with an EPS of an impressive $0.36 per share. In terms of revenue, the company continued on its high growth momentum, delivering gains of a staggering 41% climb on a year-on-year basis. This growth surge in revenue was the highest the company achieved in the last eight quarters.

The quarter was a clear indication of record-high performance, with the company passing the 10,000 customer mark, due to the demand for its subscription-based service, which had risen by 42%. CFO Kevan Krysler attributed this to the company’s “relentless focus on innovating” for its customers. What I find most impressive about this growth is that it largely draws on heavy cost optimization, as indicated by the improvement in its net income margin over the years. This shows that the growth is sustainable, as it allows the company to scale up and minimize its cost of services. This upward trend is especially apparent in the prior five quarters:

Looking forward, these figures inspire significant optimism in relation to the stock’s potential. The company has increasingly proven to be highly efficient at converting sales into net profit, which increases its growth potential. I believe this efficiency would allow the company to keep a greater proportion of its profits, which it can use to fund further growth and enhance its market share.

The growth also points to the demand for digital analytics in an increasing number of firms across industries. PSTG, as highlighted above, is a sort of pioneer in the field that delivers a wide range of storage-related solutions that range from optimization to protection and encryption. I believe that the company is showing an impressive growth trend after having identified a clear market need and attempting to become a leading solution provider in relation to it. Its performance shows the success with which the need is being met and continues to capitalize on its ability to do so.

Valuation

Also, the greatest potential intrinsic to PSTG, which makes up its value, is the stock’s growth potential. This is listed out below in comparison to peer stocks from the data storage sector:

In terms of its price ratios, in relation to sales, book value, and cash, PSTG stands moderately, with no direct indication of an undervaluation. However, the value for the stock is best determined through its performance-based growth, as opposed to its price ratios, which portray a snapshot in time, rather than a forward-looking stance.

On a year-on-year basis, PSTG saw its EPS grow by an impressive 176.92%, highlighting the rapid nature of the company’s earnings growth.

This growth is not just impressive in the short term, but there is also a long-term perspective to it. PSTG grew its sales by 24.20% in the last 5 years, the highest of each of its competitors in the market. This hints at the sustainability of the stock’s growth hold. I find this especially impressive, given the remarkable gross margin the stock holds, which stands second highest at 67.5%.

PSTG may not be a value stock, which is why I am lax about its price ratios. However, its growth in performance, compared to its peers, makes it more valuable. With the rate the industry is growing, this surging growth is simply the beginning.

Risks

Despite the promise which I am certain PSTG holds, assigning too much weight to growth potential comes with clear downsides. The most obvious is that there is no clear indication as to how long such a growth surge may be sustained, and there is no way of telling when its performance will flatten out. Currently, the data storage sector has a CAGR of 7.1%, yet its earnings growth is far higher. Eventually, the growth would be limited and dependent on Pure Storage capturing market share from its competitors, some of which are far more muscular players in the industry. This would thus put further pressure on the company to consistently deliver innovative technologies to enhance its offerings.

Conclusion

PSTG is riding a growth wave that I reckon investors would be wise to hop along on. The company manages to achieve earnings growth at such stellar levels due to its commitment to understanding the needs of its clients and innovating its data storage solutions as per those needs. This strategy alone makes the company’s financials extremely sustainable, and thus puts it in line to become a leader in the industry, given its rapid growth.