Securing A Design Win With A Top 4 Hyperscaler Will Expand Deployments And Market Penetration

Key Takeaways

• Achieving a design win with a top hyperscaler may escalate revenue and operational scale, enhancing market penetration across tiers.
  
• Expansion of the E family in response to rising AI data demand positions for potential revenue and margin growth amid AI-driven opportunities.
  
• Increased costs, slow deal closures, and geopolitical risks may pressure Pure Storage's margins and revenue growth amidst fluctuating international demand and market transition challenges.

Catalysts

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

• The achievement of a design win with a top 4 hyperscaler could significantly increase future revenue through expanded deployments across multiple performance tiers, marking a shift in operational scale and market penetration.
  
• The launch of the 150-terabyte DirectFlash module and plans to double capacity to 300-terabytes hint at increased demand capability, potentially boosting future revenue and profitability by displacing traditional storage options.
  
• The expansion of Pure's E family to address the anticipated tenfold rise in unstructured data due to AI over the next five years suggests potential improvements in future revenue and gross margins as AI-driven demand grows.
  
• The Evergreen//One program's strong customer satisfaction and high existing customer growth indicate potential enhancements in recurring revenue and net retention, positively affecting earnings and cash flow.
  
• The GA release of Fusion version 2 could lead to significant gains in operational efficiency and cost reduction for enterprises, driving more sales and enhancing subscription service revenues, thus positively impacting net margins and overall earnings.

Pure Storage Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Pure Storage's revenue will grow by 12.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 10.9% in 3 years time.
• Analysts expect earnings to reach $490.1 million (and earnings per share of $0.88) by about April 2028, up from $106.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $637 million in earnings, and the most bearish expecting $340.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 58.7x on those 2028 earnings, down from 118.2x today. This future PE is greater than the current PE for the US Tech industry at 12.7x.
• 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 7.78%, as per the Simply Wall St company report.

Pure Storage Future Earnings Per Share Growth

Risks

• The rise in NAND prices relative to disk competition negatively affected Pure Storage's gross margins last year, which may impact their ability to maintain competitive pricing and could pressure net margins if NAND prices do not moderate as expected.
  
• The slow deal closing times for larger Evergreen//One service offerings may compress revenue growth, especially if these larger transactions do not accelerate as anticipated.
  
• Geopolitical uncertainties and potential tariffs could introduce additional supply chain challenges, which may increase costs and affect net margins, potentially influencing the revenue outlook if global trade tensions persist.
  
• International revenue declined by 3% year-over-year in Q4, which could indicate regional demand variability or competitive pressures that could impact overall revenue growth.
  
• The competitive landscape and potential misalignment or misunderstanding in the market regarding the transition to Evergreen//One could result in a slower uptake of Pure Storage's as-a-Service options, impacting their revenue mix and net margins.

Valuation

• The analysts have a consensus price target of $70.056 for Pure Storage based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $4.5 billion, earnings will come to $490.1 million, and it would be trading on a PE ratio of 58.7x, assuming you use a discount rate of 7.8%.
• Given the current share price of $38.69, the analyst price target of $70.06 is 44.8% 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.