Shares of next-gen data storage company Pure Storage (PSTG 1.40%) fell hard after its latest financial update, and tech investor Cathie Wood took the opportunity to nearly double up on a small existing position within the Ark Next Generation Internet ETF.
After the post-earnings tumble, Pure Storage stock is now up just 10% in the last 12-month stretch, lagging behind the nearly 23% gain of the Nasdaq Composite index over the same time span.
Investors might have temporarily soured on the stock, but the company is still putting up significant growth as it helps customers resolve pain points when expanding their digital workloads. This could be a top investment for 2024.
The market hates parsing through accounting effects
Let's first address why the stock fell following the latest quarterly update. In the fiscal 2024 third quarter (for the three months ended in October 2023), revenue slightly beat management's guidance and was $763 million, a 13% year-over-year increase.
However, full-year revenue guidance (for the 12 months ending in January 2024) was slightly downgraded to $2.82 billion, implying growth of just 2.5% over last year. The previous guidance was for full-year growth in the mid- to high-single-digit percentages. Is the Pure Storage growth story coming to an abrupt end?
Not at all. However, the market hates dealing with accounting effects that distort a growth story, and that's what is eating at Pure Storage stock at the moment. The company is a hybrid of sorts, selling its flash memory products and bundled software outright (a consumption-based model), but also offering subscriptions to its digital memory systems (the Evergreen//One and Portworx services).
The subscription services are performing wonderfully for Pure Storage. An increasing number of customers are making their data storage needs a flexible and ongoing operating expense, rather than big, lumpy capital expenditures on storage hardware.
This is good for Pure Storage's stable long-term growth and also smooths out its own profit margins (the fourth-quarter adjusted operating margin is expected to be 19%, higher than the full-year expectation of 16%).
But more subscription revenue reduces the immediate-term outlook. Subscription service revenue was up to 41% of the total in the third quarter and has been steadily rising as a percentage of total sales every year.
| Metric | FY 2020 | FY 2021 | FY 2022 | FY 2023 | FY 2024* |
|---|---|---|---|---|---|
| Subscription revenue growth (YOY) | 43% | 33% | 37% | 30% | 26% |
| Subscriptions as share of overall revenue | 25% | 32% | 34% | 35% | 43% |
Data source: Pure Storage. Note: The fiscal year ends in early February of each year. * = accounts for just the first nine months of the fiscal year. YOY = year over year.
Add in the delay of a $41 million order delivery to a telecom customer from the fourth quarter to early next year, and management reduced its revenue guidance for the current fiscal year. The company's upward trajectory remains intact, though.
Pure Storage is the real deal
Pure Storage has consistently been named a leader in enterprise data storage by tech researcher Gartner, and the importance of data storage is only rising in this new era of generative AI. The company has been landing new AI deals as many of its customers tap its flexible offerings for the management of data used in training AI models.
Pair this with its affordable and high-performance work in all-flash storage (which has far higher performance than traditional hard disk memory), and Pure Storage is the real deal. It's shaping up as a great investment, offering far more consistent revenue streams and profitability than memory chip manufacturers and other hardware-only based memory stocks -- like Micron Technology for example.
Data by YCharts. TTM = trailing 12 months.
That said, Pure Storage is a newer business, founded in 2009 and making its publicly traded debut in 2015. The stock price can be volatile as a result. As is often the case with stocks like this one, I employ a dollar-cost averaging plan to build a position over time.
Nevertheless, after the recent sell-off that overlooks Pure Storage's momentum, I agree with Cathie Wood and think this stock is a great buy headed into 2024. Shares trade for about 25 times trailing-12-month free cash flow and about 25 times Wall Street analysts' early expectations for next year's earnings per share. This could be a great long-term value among top memory chip and semiconductor stocks.
