No, this isn’t a post about Guns N’ Roses.
It’s a post about Pure Storage.
I admit to looking for good risk-reward scenarios. I’m a reformed value hunter (I don’t attend the meetings though) with the preponderance of my holdings in highly valued names. So while my portfolio is dominated by high growth companies, I still have a penchant for safety and some margin of error.
But enough about me. Here’s Pure Storage in a nutshell for their Q2 2020. I absolutely hate how newfangled companies can’t follow normal freaking quarters! I understand if your Q1 needs to start at different times, but at least make them follow the normal cycle for crying out loud!
Wait, I’m supposed to be talking about Pure.
First, many will downright toss this post to the side because Pure (dropping the “Storage” now for brevity sake) is a hardware company. I agree. They are. I’m trying to help you not have to read further.
Q2 produced growth of 28% just above the mid-point of guidance for the quarter. Gross margins were over 69%, the highest in company history. But Pure guided down a bit. A high growth stock would be slaughtered with the quarter, but we have to remember the price of Pure is completely in the tank. There “appears” to be a reason for the guide down that may actually be a benefit.
“Appears” is in quotes because the next paragraph is supposition on my part based on listening to the call. Others more knowledgeable in the Storage space please feel free to chime in.
NAND prices have dropped. The dynamics of this actually seem a bit more complicated than one might think. First, as prices drop, revenue per terabyte (TB now) drops. So unless more TB are sold, revenues will fall a bit for PURE. Ack!!! Hardware. But, flash also becomes more economical than it was compared to traditional storage at the same time and margins generally go up too. So you tell me where that ends??? At any rate, NAND prices are expected to stabilize going forward, and while the company couldn’t predict when prices will rise, it should be in the next few quarters. Supply is coming down based on the glut that drove prices down currently.
Guidance implies growth for the year at the mid-point will be only 23.6%. Guidance last quarter suggested 27.5% growth so there is a decent slow down due to NAND pricing. Management also hedged guidance based on the macro outlook but stated this was secondary compared to NAND. My best guess is 80% NAND and 20% macro. Management did state that macro did not seem to be an issue for them. It was tough to write that sentence after writing the one before it.
One data point and one anecdote on the macro situation to support management’s “feel” of the non-effect.
Deals pushed in the quarter were lower than the prior quarter (data point). Pure believes their vast outperformance as a market share gainer makes them immune (to a degree) to macro effects.
Good gravy, this is a long post. But if you have made it this far, here is the good news.
Pure is significantly outpacing any of their notable competition growing at roughly 10x their pace. NetApp had an awful quarter with Flash dropping something like 11%. Pure just grew 28% with gross margins of 69%+, OpM of just below 0%, FCF positive, cash on hand of $1.2B, net cash after senior notes of ~$700M, and what seems like an excellent management team to boot.
NAND prices will turn from a headwind to tailwind and even if they don’t market share will continue to rise and traditional storage will decline. When prices are a tailwind, revenue growth will increase, and, this guy believes, the stock price will rise.
Pure seems to have a great competitive advantage as a first mover in several important aspects of the storage business both on-prem and in the cloud. The valuation is confounding and can be a reason to stay away, but at the same time incredibly compelling.
I doubled my very small stake in the company today prior to the bell. It is my smallest position and one that I plan on building. The stock initially went down 10% and is slightly up as of right now. Whether it is down or up today doesn’t excite me. The business actually seems to have a great stride compared to its competitors, and I don’t see the storage market shrinking over time.
Interested to hear what others think and happy to answer any questions as best I can. I am not up to speed on any technical aspects.