AI Data Growth And Hyperscaler Wins Will Drive Cloud Expansion

Key Takeaways

• Expansion into hyperscaler partnerships and subscription services is expected to accelerate recurring revenue and drive long-term operating leverage and margin improvement.
  
• Innovations in energy-efficient, flash-based storage and unified management position the company to capitalize on AI-driven data growth and stricter ESG requirements, enhancing market share.
  
• Rapid technology shifts, margin compression, and customer concentration risks threaten Pure Storage’s growth and profitability amid a changing enterprise IT and storage landscape.

Catalysts

Engages in the provision of data storage and management technologies, products, and services in the United States and internationally.

• Pure Storage's design win with a top-four hyperscaler is progressing through testing and deployment, with discussions around future use cases and accelerated engagements with other hyperscalers; successful execution here could unlock substantial new recurring revenue streams and operating leverage into fiscal 2027 and beyond as production deployments ramp.
  
• The company is capitalizing on the rapid acceleration of unstructured data creation driven by AI and digital transformation, positioning its next-generation all-flash E family as the primary disk replacement solution, which not only expands its share of the growing addressable market but, as NAND pricing moderates, is expected to restore product gross margins to the long-term normalized range of 65 to 70 percent and drive sustained top-line growth.
  
• Launch and strong initial uptake of Pure Fusion version 2, which enables unified, automated management of large-scale enterprise storage (transforming data silos into data clouds), is anticipated to increase customer stickiness, enable enterprise-wide AI/analytics use cases, and drive a network effect that could meaningfully accelerate subscription revenue and enhance net dollar retention over the longer term.
  
• Pure's continued success in developing and commercializing energy-efficient, dense DirectFlash modules (150TB shipping, 300TB on track this year) and the ability to deliver dramatic data center power and space savings position it for outsized wins as enterprises and hyperscalers adopt stricter ESG and efficiency mandates, supporting competitive differentiation and improving gross margins as scale is achieved.
  
• Momentum in expanding subscription services—with 21 percent year-over-year growth in annual recurring revenue and a long-term net dollar retention of 115 percent—alongside global expansion and increasing adoption across Fortune 500 and international markets, points to robust multi-year compounding revenue and cash flow, justifying bullish earnings growth projections as Pure Storage continues to shift its base to higher-margin, recurring as-a-Service offerings.

Pure Storage Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Pure Storage compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Pure Storage's revenue will grow by 13.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 3.4% today to 13.7% in 3 years time.
• The bullish analysts expect earnings to reach $637.0 million (and earnings per share of $0.94) by about April 2028, up from $106.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 60.0x on those 2028 earnings, down from 126.0x today. This future PE is greater than the current PE for the US Tech industry at 11.7x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.79%, as per the Simply Wall St company report.

Pure Storage Future Earnings Per Share Growth

Risks

• A secular decline in enterprise IT spending on traditional infrastructure, as customers shift budgets toward AI, security, and software-based solutions, could reduce demand for Pure Storage’s hardware-focused offerings and weaken its long-term revenue growth.
  
• The accelerating pace of disruptive technology change, including the rise of hyperscale cloud providers developing their own proprietary storage and advances in alternative storage paradigms, risks making Pure’s current flash-based products obsolete, potentially requiring costly reinvestment or leading to revenue and margin decline if Pure fails to keep up.
  
• Pure Storage’s continued heavy investment in R&D and sales to maintain competitiveness, pursue hyperscale design wins, and develop new solutions like Fusion may constrain its ability to expand net margins and deliver consistent earnings growth over time.
  
• The commoditization of flash technology and aggressive pricing to displace disk solutions is already pressuring Pure’s product gross margins, particularly as the E family becomes a larger part of the revenue mix, and this margin compression could intensify as price competition persists or worsens.
  
• A meaningful portion of Pure Storage’s revenues are exposed to customer concentration risk and potential displacement by hyperscale cloud providers that may choose not to expand Pure deployments or shift to their own storage architectures, posing a threat to future revenue and profitability stability.

Valuation

• The assumed bullish price target for Pure Storage is $93.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Pure Storage's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $93.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $4.6 billion, earnings will come to $637.0 million, and it would be trading on a PE ratio of 60.0x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $41.26, the bullish analyst price target of $93.0 is 55.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.