Why Was Pure Storage IPO So Lackluster?

  • Pure Storage's much-awaited IPO has not gone according to expectations.
  • It appears as if investors are wary of the company's spiraling losses and slowing top line.
  • Pure Storage's top line, however, is growing significantly faster than its operating expenses giving the company a good chance to become profitable.
  • Pure Storage shares are likely to make a comeback.

Fabled all-flash arrays, or AFA, manufacturer Pure Storage has started life as a public company on a sour note. Pure Storage shares are down more than 5% from their opening IPO price of $17. Pure Storage shares closed at $15.93 on Thursday, 8th October, after second day of decline.

Pure Storage 1-Day Share Return


Source: CNN Money

To be fair, Pure Storage IPO is not the only tech IPO that has gone haywire. Many 2015 tech IPOs have fallen harder than the broader market. According to Renaissance Capital, more than 60% of this year’s tech IPOs are currently trading below their IPO price. Notable IPOs that have not gone according to expectations include cloud storage company Box (NYSE:BOX) whose shares have been dropped by half since their debut on the bourses.

But what’s alarming about Pure Storage’s case is that most IPOs, including Box’s, have usually started on a bright note and only tanked a lot later. So what’s making investors shun Pure Storage’s shares so early on?

Money losing streak

Let’s start by cutting Pure Storage some slack. Venture Capitalists have lately been pumping massive amounts of money into startups as they look to cash out on their investments by taking their companies public. VC investing exceeded $17 billion during the second quarter of the current year for the first time since 2000. Although IPOs in 2015 have not matched the record-breaking levels achieved in 2014, they are nonetheless not far behind. So there likely is an element of market weariness as far as IPOs go.

But that does not fully explain Pure Storage’s lackluster IPO. After all, Ferrari’s (Pending: FRARI) upcoming IPO is expected to be a blockbuster, with demand for Ferrari shares expected to exceed 10 times the available float. So why are investors so interested in Ferrari’s shares but not so much in Pure Storage’s? In one word: profits. Ferrari is a high-end luxury auto maker with very profitable operations while Pure Storage has been experiencing spiraling losses over the years. A peek into Pure Storage’s S-1 filing reveals as much. The company reported revenue of $6.07 million, $42.73 million, and $174.45 million in FY 13, FY 14 and FY 15, respectively. While the company’s top line has been expanding exponentially, its losses have unfortunately been expanding almost equally as fast. Pure Storage reported losses of $23.36 million, $78.13 million, and $180.48 million for FY 13, FY 14, and FY 15, respectively.


Source: The Register

Pure Storage revenue grew by an impressive 167% Y/Y during the first half of 2015 to $158.74 million. That’s much faster than its AFA peers, Nimble Storage (NYSE:NMBL) whose revenue grew by 49% to $80.1 million and Violin Memory (NYSE:VMEM) whose revenue declined 33% Y/Y to $18.1 million during the last quarter. And just like Pure Storage, Nimble Storage and Violin Memory are also languishing in the red.

Despite Pure Storage’s impressive top line growth, investors have been quick to point out that Pure Storage’s Q/Q revenue growth is not as impressive as it has been in the past.


Source: The Register

Of course part of the reason why Pure Storage’s top line growth has been slowing down quite a bit can be attributed to the law of large numbers. But with the company’s shares priced for explosive growth, investors are bound to nitpick every little detail. Pure Storage shares trade at 17x 2015 sales compared to 5x by Nimble Storage and just 2x by Violin Memory. What might have spooked investors is the possibility that Pure Storage’s revenue slowdown is being caused by intense competitive pressure. Several large players including NetApp (NASDAQ:NTAP), HP (NYSE:HPQ), Oracle (NYSE:ORCL), as well as hybrid flash array manufacturers Tegile and Tintri have all unveiled new AFA products over the past six months, around which time Pure Storage’s Q/Q growth seems to have slowed down.

Shares can still make a comeback

Despite the dark cloud hanging over Pure Storage IPO, I firmly belong to the camp that believes the shares will make a strong comeback. Tech investors are known to crave top line growth at any expense, and that’s exactly what Pure Storage brings to the table. Growth companies in the tech sector usually receive a lot of equivocations, including investors tolerating losses for years, as long as their top line keeps expanding at a brisk clip. Think of cloud companies like Salesforce and Workday which have been sitting in loss-making territory for years yet have made impressive share gains over the years, courtesy of their strong top line growth. Pure Storage is the fastest-growing player in the rapidly-maturing AFA industry, meaning the company is busy stealing market share from its rivals. It’s only a matter of time before the investing world starts appreciating this fact.

Meanwhile, Pure Storage losses appear to be slowing down. During the first 6 months, losses grew just 18% Y/Y, much slower than top line growth. High S&M expenses are mainly to blame for Pure Storage’s losses. The company spent 68% of revenue on sales and marketing expenses during the first half of the current year. S&M expenses accounted for 52.4% of the company’s operating expenses. Luckily, Pure Storage’s S&M expenses grew ‘‘just’’ 50% during the first half of the year, which though high was still much slower than top line growth.

If the company is able to control this line item while its revenue growth maintains its impressive momentum, it won’t be long before the company is able to finally turn a profit. You can expect the shares to hit fresh highs once the company becomes profitable. In the meantime, high top line growth might be enough to keep investors interested in the company.

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