Pure Storage: A must read article

https://www.forbes.com/sites/patrickmoorhead/2018/01/27/dont…

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Yep - kind of what I’ve been banging on about for the last 9 months.
Ant

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My question is…

Will it get commododized?

My question is…

Will it get commododized?

In time more than likely but it could take a decade or two, not something to worry about specially for agile investors like Saul and Company.

Denny Schlesinger

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A couple weeks ago I was skeptical of Pure because, in my opinion, of the high S@M costs. This is still a concern of mine, but with all the great information everyone has been posting on Pure, I think I was wrong. There is a lot to like with this company.

One thing that has helped change my mind is their new CEO, Charlie Giancarlo. Former Cisco executive, with an impressive track record, wouldn’t have taken this job unless there was big upside for this company. I think he will be improving the S@M costs in short order. He also sits on Arista’s board.

Similarities with Arista.

Thanks for helping me see the light Ant, Bear, et all.

Jimbo

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Pure seams to have some really great tech (hardware and software). Something I want to get more information on is their business model built on Evergreen. It is self described as “To make owning storage as close to experiencing storage-as-a-service as possible – but in your data center.” here is a great link describing the Evergreen service.

https://blog.purestorage.com/why-all-the-buzz-on-evergreen-s…

Could this be their special sauce? Subscription based storage service. Always upgrading, always up to date, scalable, and seamless? Creating a continual base for new and better products. Could this ease some of the commodity concerns?

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ill it get commododized?

In time more than likely but it could take a decade or two, not something to worry about specially for agile investors like Saul and Company.

Denny,

I’d love to believe that. I don’t believe it yet because I don’t know enough about how competitors can’t do what they do. What’s the data and logic behind your assertion?

Chris

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What’s the data and logic behind your assertion?

Chris

Data:

I’m assuming that Pure Storage’s products are more than plug compatible boxes.

Logic:

The Gorilla Game by Geoffrey Moore, one of the preeminent marketing gurus of Silicon Valley and the Science of Complexity, more specifically “path dependence.”

You say “I don’t believe it yet because I don’t know enough about how competitors can’t do what they do.” Of course competitors can do what they do, that’s not the issue. The issue is whether customers would or would not switch. All else being equal the issue is economic, the cost of switching. If you have sunk a lot of time and money to learn to use something and an equivalent product comes along but with a different interface that requires time and money to learn, there is no incentive to switch.

Denny Schlesinger

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Absolutely they will be commoditized. Essentially, they offer the same thing as spinning discs with greatly enhanced performance (power consumption, heat, footprint, data transfer rates).

When will it be commoditized is the more germane question. Denny suggested a couple of decades if I recall. I don’t think it will take nearly that long, but even 5 years would be a pretty long time and they’re probably good for at least that long. First mover gives them an advantage.

The other problem PSTG faces, which I noted elsewhere is supply chain constraints. There’s a world wide shortage of solid state memory. This is in the process of being addressed. Last year semiconductor manufacturers’ largest collective expense was Capex to enhance existing or bring new capacity online for memory fabrication. I don’t have any idea when that spend becomes productive capacity.

I’ve not bought yet, but I’m poised to take a position.

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When will it be commoditized is the more germane question. Denny suggested a couple of decades if I recall. I don’t think it will take nearly that long, but even 5 years would be a pretty long time and they’re probably good for at least that long. First mover gives them an advantage.

It depends greatly on what they offer. If it is just a plug compatible replacement it gets commoditized quickly. If switching costs are high, they retain control for a long(er?) time.

EMC and NTAP retained control for quite some time, longer than spinning disk sellers. Check out the switching costs.

Denny Schlesinger

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NTAP is Still making $1 billion a year and is resurgent. Selling at more than 3x revs and 27x trail PE according to Yahoo! Hardly commoditized even 17 years later.

This said I got a 10x out of NTAP in the internet bubble. Went from $4 bil to $40 bil mkt cap and back down. Thus, market cap wise 4x in 16 years. Not so hot - but not disastrous. Reflects the dark period when NTAP missed the SSD evolution.

Currently PSTG Sells for about 4x this year’s expected revenues after cash.

Seems even if PSTG does not grow its multiple that it should at least grow with its growth rate for many years, assuming it does grow at least as planned and continues to gain market share and build out the parallel storage paradigm.

Of course a reasonably priced stock is always problematic for me, but perhaps not in this instance.

Tinker

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Hello Brittlerock,

The other problem PSTG faces, which I noted elsewhere is supply chain constraints. There’s a world wide shortage of solid state memory. This is in the process of being addressed. Last year semiconductor manufacturers’ largest collective expense was Capex to enhance existing or bring new capacity online for memory fabrication. I don’t have any idea when that spend becomes productive capacity.

One of Pure’s advantages is that they are the only storage vendor able to utilize consumer flash
rather than enterprise flash. Enterprise flash is more expensive and is the flash that has suffered supply constraints. (being the only vendor allows them to get even better prices from
suppliers in addition to not being subject to supply issues).

The above is from Pure’s CEO in direct response to an analyst question at the WFB tech conference in December. The comment appears in the last couple minutes of the audio.

Best regards,

Mike

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Being able to use consumer flash rather than enterprise sounds very reminiscent to Arista’s hardware being far cheaper than Cisco’s.

I also noted the phrase “software defined” within the section about Pure…reminiscent of Arista’s secret sauce being software defined networking (SDN).

I am leaning more and more towards making my PSTG a 6 or 8% position with the $17.50 call options I bought on the same morning as my 1.8-ish % position of plain ole shares.

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Thanks for your reply. I was not aware of that PSTG could employ consumer grade flash.

One of Pure’s advantages is that they are the only storage vendor able to utilize consumer
flash rather than enterprise flash

I’m not sure that’s a good thing if I’m trying to do enterprise-class work and need enterprise-class reliability, fault-tolerance, etc. Sure, I can buy a Yugo if I need a car to get to work, but am I going to reliably get to work every day? (I’ll leave the younger crowd to use their Google powers on ‘Yugo’ if necessary.)

If they’re aiming at the SMB market that’s only looking at price per GB/TB, they can sell a few boxes. Once, anyway. But when that SMB company grows and needs something else, are they going to go back to that same vendor that sold them a white-box, consumer-grade storage system?

For full disclosure purposes, I am employed by a competitor to PSTG that’s been around for “a long time” and might be one of the ones mentioned above. I’m not bad-mouthing PSTG, and in fact, I’ve actually been looking for an entry point for my self-managed portfolio – I don’t care where the gains come from if they can help me reach my financial goals, with only a few exceptions, and am not too proud to drink someone else’s Kool-Aid if it’s legit. Just saying that “cheap” is not always the best route. I definitely wouldn’t buy a second hypothetical Yugo…

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Hlygrail,

I will not talk from expertise, because I do not have any, other than my understanding of flash memory is that there are only so many read and writes that you can do to a bit of memory before you can do no more. Perhaps that has changed.

I also cannot comment beyond what was quoted about using consumer flash. I don’t know, and is worth a look.

However, what is clearly evident, is that PSTG’s products meet enterprise standard reliability, even for the most critical functions. There is no issue regarding PSTG’s products quality or reliability, and I fact, the company has the highest, by far, customer satisfaction rating in the industry, part of which is because PSTG uses the cloud to predict, before it happens, any storage failure, and is on the scene before hand to prevent it. 6 9s of reliability or such.

PSTG storage is used basically anywhere you can put an EMC or NTAP system without concern of reliability. No, PSTG does not have the product diversity of these larger companies, but in any area that these companies do compete against PSTG, the quality of the flash is not an issue in regard to reliability.

Tinker

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Small point to add: Pure does have a government-specific section of the website. I haven’t yet dug deeply enough to see if they break out their government segment in their earnings results.

https://www.purestorage.com/solutions/industries/government…

What’s the failure rate of consumer grade flash memory? I don’t know, just asking, but my guess is that it’s probably in the 6 zeros category. That’s the in the range of data accuracy internally demanded by Jeppesen. If you don’t know who they are, they provide virtually all the maps and charts for aircraft, from little private single prop planes up through great big commercial jets.

For those instances where even greater integrity might be demanded (I can’t think of any as most corporate data has far more quality problems than that - but anyway), they can always steal a page from EMC who many years ago implemented redundant storage of critical data.

In other words, I don’t see a problem. Looks only like a bene to me. Am I missing something?

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Hello Tinker,

It is even better if you believe Charlie (PSTG’s CEO). I know that you do because he is on ANET’s
BOD and I’m not sure you could think more highly of a company than you do of ANET. At the same
WFB tech conference, Charlie was asked his impressions of Pure during his short stint there. One of his comments was that multiple customers had told him that the Pure product was the “best they had ever encountered”.

He also commented that the legacy vendors in some cases enjoyed more feature-rich offerings and that Pure would remove that over time. (as you point out in your post)

I like this company very much and believe that they will do better and better stock-price-wise
as the market gains better understanding and agree with your post over on NPI that that process has begun.

Best regards,

Mike

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Thanks Mike.

I may have to enact one of my rules of sale, and that is when a compelling opportunity comes along. Makes it more difficult when one has to sell some of what is extremely compelling as well to invest in the compelling opportunity. But some diversification (such as it be :wink: ) may be good.

I have around 20% of my port that I can play with, without any tax consequences.

Need to do some more enjoyable reading tonight.

Tinker