- All-flash array storage company, Pure Storage, filed for IPO last week.
- The company controls 18 percent of its niche and is positioned to benefit further from expected growth.
- Pure Storage’s top-line growth with no debt and a large amount of cash strengthen the company's offering.
- Expected IPO P/S is significantly higher than EMC and NetApp, and investors should be very careful not to buy into an overvalued unicorn.
Pure Storage is a $3 billion unicorn that provides flash-based storage services that replace traditional rack-based mechanical disk storage and provide better performance at lower costs due to the advantages of flash storage. Pure Storage’s solution contains three components:
- Purity Operating Environment – flash-optimized software solution.
- Flash Array – custom-made hardware component designed to maximize flash-storage density and maximize the performance of the Purity Operating Environment in a way that also minimizes solution costs for customers.
- Pure 1 management and support – cloud-based platform that simplifies data-center management and enables customers to monitor their global storage deployment from every device.
Pure Storage filed for IPO last week, seeking to raise $300 million on top of the $530 million the company has already raised in the private market.
Pure Storage Market
Pure Storage operates in a very competitive market alongside giants such as Cisco (NASDAQ:CSCO), HP (NYSE:HPQ), IBM (NYSE:IBM), Lenovo (OTC:LNVGY), NetApp (NASDAQ:NTAP), and EMC (NYSE:EMC). Although Pure Storage competes with tech titans, the small, Mountain View-based startup is the second largest player in the all-flash array market with an 18% market share, which is five percentage points behind market leader EMC.
Pure Storage is breathing down the neck of EMC and has hired EMC sales professionals, ex-EMC executives for Pure Storage’s board, and product development employees. This aggressive strategy triggered a number of lawsuits by EMC claiming that Pure Storage’s hiring activity was a scheme to misappropriate EMC’s confidential information and trade secrets and to interfere unlawfully with EMC’s business relationships with its customers and contractual relationships with its employees. EMC also claimed, in a separate lawsuit, that Pure Storage infringed five patents held by EMC. Both lawsuits are still pending.
The all-flash array is the next generation of storage technology, and it is bound to replace the mechanical disk storage that is currently widely in use. All-flash array storage technology can save corporations large amounts of money in storage maintenance fees, support, CapEx, and space. According to Pure Storage’s saving calculator, shifting from disk-based storage to flash array storage could save an enterprise around $2.5M for 50TB of storage at a 10% storage growth rate. As storage capacity and storage growth rate rise, enterprises can save even more, up to $82M, for a 150TB storage with a 100% storage growth.
Because of the attractive cost reduction features associated with an all-flash array storage, estimations assume that this market will rise rapidly from $1B in 2014 to more than $2B in 2016 – and that presents a massive opportunity for Pure Storage, which is poised to benefit from its leadership position in the market.
Pure Storage Financials
As shown in chart 2 below, Pure Storage grows its top-line revenues at a phenomenal pace; the company generated $175M revenues in the fiscal year 2015 (ended January 31, 2015) which is 29x more than its fiscal year 2013 revenues. The company improved its gross margin from only 29% in 2013 to 60% in Q116; however, a three-digit percentage increase in operating expenses drove the company’s bottom line to around a $180M loss in the fiscal year 2015. In the first quarter of 2016, Pure Storage has already generated 42% of its 2015 revenues coupled with 27% of 2015's net loss.
On the balance sheet, the company presents an impressive amount of cash and cash equivalents of $173M, and when combined with zero debt on its balance sheet, this makes the company financially sound.
Funding and Valuation
Pure Storage IPO has been preceeded by seven private market equity funding rounds, which raised $530M, from October 2009 to August 2014. Early investors in Pure Storage included leading investment firms such as Greylock, Fidelity Ventures, T. Rowe Price, and Index Ventures, alongside CIA venture arm In-Q-Tel and Samsung’s corporate VC fund, Samsung Ventures. The company raised most of the funds in two funding rounds in 2014, during which Pure Storage offered 18 million shares at a $15.73 share price.
The company’s series F valuation of $3B reflects a P/S ratio of 13.4, which is significantly higher than EMC’s 2.08 and NetApp’s 1.53. Pure Storage's high valuation compared to its competitors reflects the company’s start-up stage and huge growth potential. However, as experience has taught us, when a tech unicorn goes public, the valuation may even get higher around the timing of the IPO. In my opinion, Pure Storage IPO could stretch the P/S ratio from 13.4 up to 20, but beyond that, investors could choose to shift their money to other ultra-growth companies with better multiples.
All-flash array storage company Pure Storage filed its S-1 with the SEC last week, seeking to raise $300M from the public. The company is the second largest player in its niche and presents an impressive top-line growth and improving gross margin. The company has a significant amount of cash and no debt, which positions it to monetize on the expected growth of the all-flash array storage market. The company was valued at $3B, which reflects a 13.4 P/S with $223M TTM revenues. I believe the company could stretch its P/S during its IPO. However, in my opinion, there are other companies worth looking at if the P/S ratio exceeds 20.
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