One of the more interesting cloud-oriented companies in recent years has been Pure Storage (PSTG). With a market cap of just $5 billion, the business is still fairly small and it has a lot of upside. Though revenue growth has slowed this year, the company’s history of expansion is undeniably attractive and its ability to generate positive cash flow is encouraging even as the firm’s net losses continue. On the whole, Pure Storage is not a value play. Far from it. But it does appear to be an attractive growth prospect that’s trading at a reasonable price for long-term investors to consider.
Pure Storage is a growth machine
The global cloud industry represents investors with a large and growing opportunity over the next few years. This year, for instance, the market was estimated to be worth about $371.4 billion. The expectation is for it to continue growing at a rate of 17.5% per annum through at least 2025. By that point, the market should more than double in size of $832.1 billion. For the businesses that can latch on to this opportunity, the future should look very bright indeed.
One such firm hoping to capitalize on this growing trend is Pure Storage. At its core, Pure Storage focuses on a couple of operating segments. The first and largest is its Cloud Data Infrastructure unit. This includes both hardware and software solutions for cloud providers, enterprises, and other related parties. Subscription Services are also integral to the company’s operations. This area of the firm focuses in large part on IT and data needs. This mostly consists of the business’ Evergreen Storage and Cloud Block Storage offerings.
Over the past several years, Pure Storage has proven itself to be a true growth machine. One way to look at this is through the lens of customers added. Between the second quarter of the business’ 2020 fiscal year and the second quarter of its 2021 fiscal year (the most recent quarter for which data is available), its customer count expanded from 6,600 to 8,150. That’s an increase of 23.5% year over year.
While customer account data is important, there are other ways to assess the company’s expansion. Back in 2016, Pure Storage generated revenue of $440.33 million. This has nearly quadrupled through 2020, with revenue surging 273.2%, or 39% annually, to $1.64 billion. Growth is slowing some, though, with revenue having increased a more modest 20.9% from 2019 to 2020. For the first two quarters of the company’s 2021 fiscal year, revenue was $770.84 million. This is up just 6.6% compared to the $723.03 million seen the same time last year, but that should not be surprising given the economic slowdown the US and the world saw earlier in the year.
One thing that I wish I could report on as an improvement but can’t is Pure Storage’s bottom line. This has been all over the place, improving from -$213.75 million in 2016 to -$159.88 million in 2018. However, in both 2019 and 2020, the bottom line worsened. For its 2020 fiscal year, Pure Storage saw a net loss of $200.99 million. So far for 2021, the results are little changed, with the firm’s net loss of $155.56 million coming in just marginally better than the $166.35 million seen in the first two quarters of its 2020 fiscal year.
At first glance here, you may be tempted to run for the hills. But what matters more than net income is cash flow. If we examine this, and how it has changed over time, the situation gets much more attractive for investors. Back in 2016, Pure Storage generated a net cash outflow (operating cash flow) of $7.86 million. By 2018, this had turned into a net inflow of $72.76 million, and by 2020 it was $189.57 million.
So far, 2021 is proving to be an even more robust year for the business in this regard. Operating cash flow in the first half of the year came out to $85.81 million. This is a whopping 54.7% increase over the $55.46 million the company reported the same period a year earlier. If this kind of growth continues for 2021 as a whole, the company should go on to generate about $293.33 million in operating cash flow for the year. Of course, there is always uncertainty here, so let’s assume that will be the high end, with the low end being about $200 million.
Taking these cash flow measures, we can get some idea as to the value of the business at this time. For instance, using the low-end estimate of $200 million for operating cash flow, the company’s trading multiple is exactly 25. Using the projected $293.33 million, this falls considerably to 17. At the mid-point of this range, we are looking at a multiple of 20.3. As I mentioned previously, none of these price points are cheap, but for a business with robust top line and cash flow growth, it’s not a bad play to consider. As an example, if we assume that cash flow will continue growing at a rate of 20% per annum for the next five years from the mid-point of our range, this would take its trading multiple down to just 8.1 today. If the firm warrants a long-term price/operating cash flow multiple of, say, 15, that would imply 84% upside for shareholders over this window. That works out to about 13% per annum, which is a solid return.
Based on the data provided, it seems quite clear that Pure Storage is an attractive, growth-oriented play with a strong market opportunity. Ultimately, only the future will determine what happens, but if growth can continue at a reasonable pace then the upside for shareholders cannot be understated. As with any growth prospect, this comes at a definite risk of underperformance should growth not match analysts’ and investors’ expectations, but that’s a risk investors who decide to buy into the firm will have to be content with.
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