Pure Storage Stock: A Big Data Pure Play
When Mr. Musk says there’s a one in a million chance we’re not in a simulation, it’s worth pondering the idea a bit. Let’s assume we’re not in a simulation and we keep designing better and better alternative realities. We’re actively doing that, and it’s called “the metaverse.” We’ll obviously make the metaverse better than reality otherwise it wouldn’t be attractive. Soon, we’d expect that everyone would want to spend all their time in the metaverse, and that would become reality. In that reality, everyone would eventually get bored and start creating a new reality. That’s referred to as a nested simulation, and there could be millions, even billions of them – a multiverse of simulations. Reality is the substrate these simulations run on, and it’s probably boring as hell, Mr. Musk proposed, as he warily eyeballed the joint of stank Joe Rogan handed him.
What every simulation has in common is data. At a molecular level, everything around us is data. (It’s also largely nothing at the atomic level.) There is a growing need to store more and more data because it represents the ultimate way to optimize our own reality by creating digital twins. Synthetic biology may be the most exciting technology we cover, but it also requires massive amounts of data to work. Data is the backbone of everything, and we wouldn’t mind getting some more exposure to it.
The Appeal of Flash-Native
In our last article on Investing in Data Storage Hardware Stocks we proposed that traditional hard drives – like most data storage technologies – have had a long run at success that’s coming to an end. Hard drives are now being displaced by flash technology and solid-state drives (SSDs). Furthermore, there’s a technology called flash-native that allows vendors to create SSDs that are superior to what’s traditionally been offered. The leader in this space is an $8 billion company called Pure Storage (PSTG) which has dominated Gartner’s magic quadrant eight times running.
It’s easy to see when you consider they built their entire storage platform from the ground up, including the software platform – Purity – which has a clear competitive advantage.
Pure’s flash drives require one-tenth the amount of power, space, cooling, and e-waste of magnetic disks, and up to one-fifth the amount of power and cooling of competitive all-flash systems, and half their space required. That works wonders for total cost of ownership spreadsheets, but who needs those when Pure’s drives cost less than hybrid storage arrays (a combination of SSDs and HDDs)? Pure’s hardware and services have been selling like hotcakes with quarterly revenues being quite cyclical over time.
Despite their rapid growth, revenues slumped last year with the company blaming the Rona. That’s a credible excuse given cheap data storage solutions should sell themselves. Looking forward, Pure expects revenues to grow by 20% this year to $2.6 billion, a small piece of the $60 billion total addressable market they’re targeting.
Growth and Profitability
We don’t like hardware companies because they always need to compete on cost which means margins are constantly being squeezed. If that happens to Pure Storage, they have plenty of blood in their turnip. With gross margins in the high 60s and a storage solution that’s already cost-competitive, Pure Storage can afford to squeeze their margins over time if they need to. In the meantime, they’re wisely diversifying their product offering into a service. Around 35% of last quarter’s revenues came from the Pure’s storage-as-a–service offering (StaaS) which is what it says on the tin. Companies store data and pay recurring usage-based fees as opposed to spending a whole bunch of capital buying hardware, renting data center space, and then paying workers to maintain it.
We absolutely love companies that sell solutions that help other companies save money. Pure Storage will find no shortage of CTOs that look to switch from in-house data storage to a subscription offering to reduce costs. Companies with large data centers – pretty much all companies these days – are always needing to increase capacity, and a low-cost provider with better functionality will come to the front of the line. It’s hard to see demand for data storage decline in a bear market, though there’s always the possibility of some companies going bust. Pure doesn’t provide us with granularity around customer numbers for the subscription business, or any other details aside from a run rate number – $849 million – that’s up 31% from the year prior. (Run rate and revenues differ because the former reflects what everyone is contractually obligated to pay while the latter reflects when they pay it.)
StaaS isn’t SaaS, so we’re not provided health metrics like net retention rate. Instead, we’re told that the average customer who spends $1 with Pure Storage will spend $2 after 24 months of being a customer. For top-25 customers, spend increases from $1 to $11 after just 18 months. When large customers increase their spending at such rates that usually indicates they’re saving costs by doing so. With a net promoter score in the top 1% of all B2B companies, it’s hard to see customers deciding to stop purchasing hardware or services from Pure provided they remain cost-competitive. More than half of all Fortune 500 companies are clients of Pure Storage which shows how broadly their solution is being adopted. Globally, adoption rates are lower with around 72% of revenues coming from the United States.
Given the current bear market, it’s important to assess survivability alongside growth prospects. Pure has $1.2 billion in cash right now and burned through $11 million last quarter, a far cry from the $80 million they burned in the same quarter the year prior. Even if we use the $143 million in losses from Fiscal 2022 as a proxy for cash burn, Pure Storage has a lengthy runway ahead. Provided nothing dramatic happens to their key raw input – flash chips – it should be smooth sailing ahead once the supply chain problems are behind them.
Because they built their entire technology stack from the ground up, Pure Storage can provide superior functionality at a reasonable cost which means companies can save money adopting the solution. An excellent piece by Wikibon published last year – Flash-native Architectures Power Next-generation Real-time Workloads – makes the case for why Pure’s platform is so compelling when compared to traditional SSD solutions like those on offer from Pure Storage competitors like Dell and NetApp.
Pure Storage isn’t a market leader by share, but they’re well on their way to becoming the leader if they can continue growing at the pace they have been. It’s the only company in the above chart that offers investors a pure play on the SSD data storage theme, unless Western Digital decides to spin out their SSD offering.
There’s a lot to like about Pure Storage, but we also need to consider opportunity costs. Is there another data firm out there we’d prefer to invest in instead? Perhaps. As we look for a way to increase our exposure to the growth of big data, we’re also considering another company whose simple valuation ratio is now within an acceptable range. Can anyone guess what company that might be?
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