Company A vs Company B

Company A

Market Cap: $5000 M
TTM Revenue: $1096 M
P/S : 4.6
FCF: $ 8 M

Company B

Market Cap: $5063 M
TTM Revenue: $ 260 M
P/S : 19.5
FCF: $ -37 M

Company A has 4x the revenue of Company B, yet they have the same market cap (value).

Company A is Pure Storage, Company B is Okta.

I am not saying either is right or wrong, I own both, just saying big things are expected of OKTA compared to PSTG.

Jimbo

22 Likes

Biggest difference in this case is probably that Pure is being thought of as a hardware company whereas Okta is being thought of as a software company.

To that factor, however, I would like to point out slide number 5 of the most recent Pure Storage earnings report presentation and to look at the gray bars at the top. That is subscription revenue, which is recurring, which seems to be why so many investors go gah-gah over SaaS as a business model.
https://s21.q4cdn.com/687136699/files/doc_presentations/2018…

Spoiler alert, Pure Storage is not solely a boring old hardware company.
Looking at the Q1 numbers from that slide to get a quick year-over-year growth rate for that recurring portion of Pure’s business, 2017 Q1 was at $25.5M, 2018 Q1 was at $39.8M, and 2019 Q1 was at $60.5M.

Y-o-Y growth rates of 56% and then 52%…so decelerating, but the TTM recurring portion of PSTG’s revenue is now at $211M with a growth rate that is still above 50%, so that compares pretty favorably to Okta’s whole company TTM revenue of $260M.

It is almost like (not exactly, of course) you could say both companies are relatively properly valued for the recurring portion of their revenue (if you assumed that Okta’s valuation makes sense), with Pure’s hardware business being thrown in for basically peanuts.

volfan84
long PSTG; no position in Okta

14 Likes

Biggest difference in this case is probably that Pure is being thought of as a hardware company whereas Okta is being thought of as a software company…

Spoiler alert, Pure Storage is not solely a boring old hardware company.

Pretty much agree on both counts. I think Arista is a pretty good comparison for Pure. They both have mostly hardware but also a smaller portion of revenue from software. But both also have great gross margins (including the hardware side). So The only difference really is that Arista either:

a) Is more trusted
or
b) Is being rewarded for its EPS (which Pure does not yet have)

In fact, even though Arista has about 60% more revenue than Pure, they spend about 35% LESS on OpEx.

If / when that changes, as is Pure’s plan, I would expect Pure’s PS ratio to (roughly) double. Of course, at that point we will be able to talk about Pure in terms of their EPS.

Bear

12 Likes

Biggest difference in this case is probably that Pure is being thought of as a hardware company whereas Okta is being thought of as a software company…

Spoiler alert, Pure Storage is not solely a boring old hardware company.

Pretty much agree on both counts. I think Arista is a pretty good comparison for Pure. They both have mostly hardware but also a smaller portion of revenue from software. But both also have great gross margins (including the hardware side). So The only difference really is that Arista either:

a) Is more trusted
or
b) Is being rewarded for its EPS (which Pure does not yet have)

In fact, even though Arista has about 60% more revenue than Pure, they spend about 35% LESS on OpEx.

If / when that changes, as is Pure’s plan, I would expect Pure’s PS ratio to (roughly) double. Of course, at that point we will be able to talk about Pure in terms of their EPS.

Bear


I would add:

c) The long term operating plan for Pure (from their slide deck) is 15-20% operating margin. Arista was at 35% last quarter if I remember right. So Arista has a business that is twice as profitable per dollar of sales, and should be valued higher. At this point Arista has a stronger business and product.

Jimbo

5 Likes

I think Arista is a pretty good comparison for Pure. They both have mostly hardware but also a smaller portion of revenue from software.

I would argue that Arista is mostly a software company (EOS) based on their ground-up operating system based on Linux using commodity hardware.

CMFBLSH
holdings: http://my.fool.com/profile/CMFBLSH/info.aspx

3 Likes

Company A

Market Cap: $5000 M
TTM Revenue: $1096 M
P/S : 4.6
FCF: $ 8 M

Company B

Market Cap: $5063 M
TTM Revenue: $ 260 M
P/S : 19.5
FCF: $ -37 M

1 Revenue growth rates
2 Gross margins
3 CAP
4 OpEx growth as compared to revenue growth

These are important considerations for making a good comparison.

Chris

2 Likes
  1. Engineers
    and
  2. Patents
1 Like

0. Engineers
and
5. Patents

Any more insight on these list additions, Najdorf?

What company are you suggesting has more engineers and patents? Arista Networks or Okta?

Are you implying that you think Pure Storage may be more about marketing than actual technical acumen? I am not a techie, but I could possibly see that being the case…but the partnership with NVDA to produce the AIRI and now AIRI Mini makes me think that they likely do have some legitimate advantages for AI applications with their storage offerings.

Thanks for any further insights behind your additions to that list,
volfan84

My insight is that no comparison btw any tech firms is going to work properly when you don’t adjust for the number/value of the engineers and patents.

Many firms in these spaces are getting bought out purely for access to the engineering talent. Talent and patents is why MSFT bought Skype in a deal that was ridiculed by those in the finance media that didn’t understand the industry.

3 Likes

the partnership with NVDA to produce the AIRI and now AIRI Mini makes me think that they likely do have some legitimate advantages for AI applications with their storage offerings

This is still an infrastructure platform only. The connectivity with Big Data is still missing. One of the challenges is, the pure platform has built-in redundancy and Hadoop comes with triple mirroring using cheap disks. You would think this is a fairly simple issue and Pure will be able to find a work around this to enable their platform to work with Hadoop. But so far they are not able to make any breakthrough with HDS or Cloudera.

Not saying Hadoop certification is important for AIRI platform. But there are challenges to realize AIRI platform potential and currently Pure has some ways to go before they realize it.

1 Like