How can is compete on price when it is losing so much money?įigure 2: Pure Storage’s Poor Profitabilityīull Case Undermined By Competitor Strength With so many offerings in the flash storage market, we think buyers will be very price sensitive, which makes Pure Storage’s deep level of unprofitability (ROIC of -72%) a major competitive disadvantage. This market includes large storage vendors such as EMC (EMC) and NetApp (NTAP), large companies acquiring similar technology such as HP (HPQ), IBM (IBM), Dell, and Lenovo, and new startup companies offering next generation storage solutions.Ī relative latecomer to this market, Pure Storage lacks not only the resources of the larger incumbents but also lack their profitability. Pure Storage faces enormous competition in the data storage market. In 2015, Pure Storage removed $53 million in stock based compensation, or 30% of revenueĮven after removing these large expenses, Pure Storage is unable to turn a “profit”, GAAP or non-GAAP.Ĭompetitive Market Diminishes Growth Prospects.In 2014, Pure Storage removed $21.6 million in stock based compensation, or 50% of revenue.Like most companies using non-GAAP, Pure Storage excludes all sorts of operating expenses from these metrics for example: stock-based compensation, assumed preferred stock conversion, and a one-time charge for an equity grant to the Pure Good Foundation. Pure Storage uses numerous non-GAAP measures to paint its business in a more positive light, as can be seen below. We’ve warned investors about the accounting practices of IPO companies as well as the over usage of non-GAAP earnings, and Pure Storage raises lots of non-GAAP red flags. Non-GAAP Metrics Are Frightfully Misleading Worst of all, Pure Storage needed to IPO to continue operating, at its free cash flow reached -$312 million (13% of market cap) in 2015. Pure Storage’s return on invested capital ( ROIC) has declined from -42% in 2014 to -72% in 2015. Unfortunately, dumping further capital into the business has been a poor investment. From 2012-2014, cost of revenues, research & development, sales & marketing, and general and administrative costs have risen 324%, 174%, 277%, and 301% compounded annually. Pure Storage has the same problem as many overvalued startups: unsustainably high expenses. Sources: New Constructs, LLC and company filings Figure 1 shows the disconnect between revenue and profit.įigure 1: Pure Storage’s Increasing Losses Pure Storage’s after-tax profit ( NOPAT) has fallen from -$77 million in 2014 to -$179 million in 2015. it seems IPO investors chose to overlook the fact that profits have remained negative. Since 2013, Pure Storage has grown revenue by 436% compounded annually. While many “unicorns” were debunked as myth in 2015, Pure Storage was able to avoid such scrutiny and went public on the strength of its revenue growth. This week’s Danger Zone is Pure Storage Inc. Post IPO, we believe it won’t take long for investors to realize this company is bleeding cash, has no profits, and faces stiff competition moving forward. This week’s Danger Zone hones in on another IPO from 2015 that may have been one of the last to capitalize on the easy money in the market. We focused on overvalued IPOs in 2015, including Square and Planet Fitness. Check out this week’s Danger Zone interview with Chuck Jaffe of Money Life and
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