Pure Storage Stock Crashes As Susquehanna Sees Delay In Profits

• Pure Storage Inc (NYSE: PSTG) shares are up 9 percent in the last three months, even after falling below $13 on November 30.
• Susquehanna’s Mehdi Hosseini initiated coverage of the company with a Negative rating and a price target of $10.
• Hosseini expressed concern over ASP pressure and required opex.

Analyst Mehdi Hosseini projected growth associated with the All-Flash Array, or AFA, market to be restricted to a CAGR of 30 percent over 2015-2020. He added that this growth rate seems insufficient to offset increased competition, which is expected to result in further ASP declines, and required aggressive opex.

“Such factors are expected to prolong time to profitability for Pure and then limit earnings power even once Pure is profitable (by FY19 which is CY18),” Hosseini wrote. Against this scenario, there are a number of risk factors that could exert pressure on Pure Storage’s valuation. There include:

1. Stiffening competition from traditional incumbents, which is expected to result in lower ASP/GB, thereby limiting revenue opportunities while also exerting pressure on gross margins
2. Less favorable scale-out capability in Pure Storage’s technology relative to key competitor, EMC
3. Lack of exposure to new emerging growth regions like China and India.

Although Pure Storage reported impressive results for the October quarter, there is lack of clarity regarding the percentage of upside that was driven by channel inventory build, “given that the majority of Pure's sales are conducted via a distribution channel,” Hosseini commented.